Limit orders are a fundamental tool for any trader looking to execute precise strategies in the markets. They allow you to set the exact price at which you want to buy or sell an asset, providing greater control over your trades. This guide explains how limit orders work, their advantages, and how to use advanced order types to enhance your trading efficiency.
What is a Limit Order?
A limit order is an instruction to buy or sell an asset at a specific price or better. Unlike market orders, which execute immediately at the current market price, limit orders only fill when the market reaches your designated price level.
When placing a buy limit order, you set the maximum price you are willing to pay. For a sell limit order, you set the minimum price you are willing to accept. Once your limit price is reached, the order is triggered and executed, provided there is sufficient liquidity.
Limit orders can be used for both opening and closing positions. It's important to note that an open limit order will lock up the required margin or collateral until it is either filled or canceled.
Key Benefits of Using Limit Orders
- Price Control: You decide the exact entry or exit price, avoiding unfavorable slippage.
- Cost Efficiency: By being patient, you can often achieve better prices than the current market offer.
- Strategy Execution: Essential for implementing disciplined trading approaches like scaling in or out of positions.
Example of a Basic Limit Order
Suppose the current market price of Bitcoin is $88,000. You believe a pullback to $87,000 is likely and want to buy at that level. You place a buy limit order at $87,000. If the price drops to or below $87,000, your order will be executed automatically.
Conversely, if you place a buy limit order above the market price—say at $88,100 while the market is at $88,000—it may be filled immediately at the best available price ($88,000), effectively functioning like a market order.
Remember: A buy limit order cannot be placed above the current best ask, and a sell limit order cannot be placed below the current best bid.
Advanced Limit Order Types
Beyond standard limit orders, most trading platforms offer advanced order types that provide additional control over execution conditions. These are particularly useful in fast-moving or volatile markets.
Post Only Orders
A Post Only order ensures that your order is added to the order book as a maker order and not matched immediately with existing orders. If it would execute immediately as a taker, the order is canceled.
This order type is useful when you want to earn maker fees by providing liquidity to the market.
Immediate or Cancel (IOC) Orders
An IOC order must be filled immediately, either fully or partially. Any portion of the order that cannot be filled right away is automatically canceled.
This is ideal when you want to capture liquidity at a specific price without leaving a partial order resting on the book.
Fill or Kill (FOK) Orders
An FOK order must be executed in its entirety immediately. If there isn't enough liquidity to fill the entire order at the specified price, the entire order is canceled.
This type is used when you require complete execution and do not want a partial fill.
Practical Examples of Advanced Orders
Let's consider a scenario involving a BTC perpetual contract. Assume the following order book snapshot:
- Best Ask: $73,27.90
- Quantity available at Best Ask: 5000 contracts
- Post Only Order: You place a buy limit order at $73,27.70 with Post Only. Since this price is below the best ask, it is added to the order book as a maker order. If you instead tried to buy at $73,27.90 (the current best ask), the order would be canceled because it would have taken liquidity and incurred a taker fee.
- IOC Order: You place an order to buy 7000 contracts at $73,500. The total sell volume available between $73,500 and better prices is 6609 contracts. Your order partially fills for 6609 contracts, and the remaining 391 contracts are canceled immediately.
- FOK Order: You place an order to buy 7000 contracts at $73,500. With only 6609 contracts available at that price level, the entire order is canceled. If you had only ordered 6000 contracts, the FOK order would have been filled completely.
👉 Explore advanced order types and strategies
Frequently Asked Questions
What is the main difference between a limit order and a market order?
A market order executes immediately at the best available current market price, while a limit order only executes at a specified price or better. Market orders prioritize speed of execution, while limit orders prioritize price control.
Can a limit order ever not get filled?
Yes. If the market price never reaches your specified limit price, your order will remain open and unfilled. This is a risk if the market moves away from your target price without touching it.
When should I use a Post Only limit order?
Use a Post Only order when your primary goal is to add liquidity to the order book and earn the maker fee rebate. It prevents you from accidentally paying the higher taker fee.
What happens if I place a limit order outside the current bid/ask spread?
For a buy limit order placed above the current ask, it may execute immediately (like a market order). For a sell limit order placed below the current bid, it may also execute immediately. To avoid this, use the Post Only option.
Are there fees associated with using limit orders?
It depends on the exchange. Most platforms charge lower fees (or offer rebates) for orders that provide liquidity (maker orders) and higher fees for orders that take liquidity (taker orders). A standard limit order that rests on the book typically qualifies as a maker order.
How long do limit orders remain active?
This varies by platform. Orders can often be set to expire at the end of the trading day (Good 'Til Day/GTD) or to remain active until you cancel them (Good 'Til Canceled/GTC). Always check your exchange's specific order duration settings.