What are limit orders and what are they for?

One of the most useful orders in trading is the limit order. These are a type of purchase or sale order that is placed with a specific price within a trading platform, such as Bit2Me Pro. This seeks to limit the purchase or sale price of an asset, in order to enter or exit of a market at a corresponding price to obtain profits or position itself in the best way within a given market.

The operation of limit order It's quite simple: the trader places the limit buy-sell price, and once the asset price is reached, the order set by the trader is automatically executed. In this way, limit orders are used to protect losses, lock in profits, or simply buy or sell an asset at a specific price.

This functionality is enormously useful for traders, and for that reason, these types of orders are one of the most used in the world of trading.

Classification of limit orders

An important point that you should know about limit orders is that they can be classified into two types:

1. Limit opening order: These orders are placed to open a position. For example, a trader can place a buy limit order for an asset with a price target of $100 to open a long position.
2. Closing limit order: These orders are placed to close a position. For example, a trader can place a sell limit order for an asset with a price target of $100 to open a short position.

Advantages and disadvantages

Knowing their classification and the usefulness of this type of orders, we can explore their advantages and disadvantages. Thus, we can mention among its advantages the following:

1. Limit orders allow traders to control the price at which they buy or sell an asset.
2. Limit orders can help traders manage their risk.
3. Limit orders can help traders secure profits.

While among its disadvantages, we can highlight:

1. Limit orders may not be executed if the price of the asset does not reach the established limit price.
2. Limit orders may take longer to execute than market orders.

How and when to use limit order?

To place a limit order, traders must specify the asset they want to buy or sell, the price at which they want to buy or sell the asset, and the amount of the asset they want to buy or sell. Thus, the ideal use of limit orders is when you meet these conditions:

1. Buy at a low price, to have a better market entry.
2. Sell ​​at the highest possible price, in order to maximize profit.

In both cases, using a limit order requires analysis of the reality of the markets, analysis of trends and anticipation of the behavior of the asset's prices. Here patience and market analysis are key, because the execution of a good limit order offers unique advantages in a good trading strategy.

Example of use

A very clear example of the usefulness of this type of orders can be seen in this case. Suppose a trader wants to place a limit order to buy Bitcoin at $26.000 per token. The trader's assumption at this point is that BTC in the middle of its downtrend will hit this price and bounce back leading the coin to a price recovery that you want to take advantage of for profit.

To do this, the trader places a buy order for $26.000 that will be executed only if the price reaches $26.000, obtaining one BTC for it. Once the order has been executed, the trader should only wait for the BTC price to recover as assumed in his strategy, and in this sense, waiting for that recovery, the trader can place a sell limit order targeting his target price: $35.000. Thus, again, when the price of BTC reaches that value, the order will be executed and the trader will be able to take his profits. He bought a BTC for $26.000 and sold it for $35.000, earning $9.000 over the duration of his operation (days, weeks or months).

In this example, limit orders are used for two things:

1. To enter a market with a desired target price. In this case, the trader wanted to enter at $26.000. If the price of BTC touches $26.000 and then starts to rise, the trader will already start making a profit, allowing him to think about his next move.
2. To exit a market avoiding losses by aiming for a desirable price. In the previous case, the trader enters at $26.000 and places his medium-term goal at $35.000. If the price level is reached, the operation is carried out and exits the market, avoiding losses.