Limit Order Explained: Advantages, Disadvantages and Applications

Introduction

The price of cryptocurrencies in the market keeps changing due to many factors. When buying or selling cryptocurrencies, users can use a Market Order to trade at the current price, or a Limit Order to specify the price at which the trade will be executed.

It is of great significance for cryptocurrency holders to know about the difference between trading methods because the price of cryptocurrencies fluctuates greatly. Therefore, if you do not know how to use limit orders to trade, it is likely that you will suffer costs when buying cryptocurrencies or obtain less profit when selling cryptocurrencies.

Limit orders can help traders and institutions formulate different trading strategies and efficiently manage capital, thus avoiding risks when prices fall, or locking in profits when prices rise. Besides, if they want to better trade in the cryptocurrency market, they can make good use of limit orders to limit the price at which they can buy or sell a cryptocurrency.

What are limit and market orders?

A limit order, as the name suggests, refers to an order that executes at a limited price. After a user places a limit order on the exchange, the order will not be completed immediately but will wait to be executed on the Order Book. Once the market price meets the price of the limit order, the limit order will be executed by matching the seller and the buyer.

Both buyers and sellers who issue limit orders will place orders on the order book to provide liquidity, thus creating a trading market. Therefore, users who use limit orders to trade are also called Makers. In order to encourage users to provide liquidity in the trading market, in most cases, users who trade with limit orders can enjoy a lower handling fee.

Users who use a limit order to trade can clearly know the trading price but will not know when it will be filled. The focus of limit order trading is the price. If the price does not meet the price specified by the user, the transaction will not be executed.

A market order is another trading method opposed to a limit order. This order executes a trade at the current market price. Once the user releases a market order, the transaction will be executed immediately against the existing pending orders in the order book until the number of transactions is met, or until there are no more matching buyers or sellers.

The buyers and sellers who issue market orders will reduce liquidity from the order book and reduce the number of funds for pending orders in the trading market. Therefore, users who trade using market orders are also called Takers. In most cases, users who trade using a market order have to pay higher handling fees.

Users who trade using a market order can clearly know that the order will be filled immediately but have no idea about the transaction price. If the price fluctuates dramatically at the time of trading, users may buy at a price higher than or lower than the market price. That’s, the focus of market order trading is time. Market orders will be executed immediately as long as there are pending orders from other users in the order book.

How Limit Orders Work

After a user submits a limit order transaction, the transaction will be sent to the order book for execution. The order book is divided into two blocks, the Bid Order (bids to buy), and the Ask Order (bids to sell).

Bid orders are ordered by prices from the highest to the lowest. A bid order at a higher price is more likely to be matched successfully with the seller, so it will be filled earlier. Conversely, a bid order at a lower price is less likely to be successfully matched with a seller, so it will be filled later.

Ask orders are ordered by prices from the lowest to the highest. An ask order with a lower price is more likely to be matched successfully with the buyer, so it will be filled earlier. Conversely, an ask order with a higher price will be less likely to be successfully matched with a buyer, so it will be filled later.

When buying, a limit order will only match the trade with the seller when the market price is equal to or lower than the specified price. Therefore, what users know is that the buying price will not be higher than the price specified by the limit order. For example, if there is a limit order to buy 1 bitcoin at $20,000, the limit order will not be executed unless the price of bitcoin goes below $20,000.

The transaction price of a limit order cannot be higher than the current market price of the transaction, otherwise, it will be automatically converted into a market order transaction. For example, the current market price of bitcoin is $20,000. However, you place an order buying bitcoin with a limit order of $20,500. It will automatically match the order with the buyer who offers a bitcoin price of $20,000 since the selling price on the order book is lower than the specified buying price. The transaction price will not be the set price of $20,500, and the transaction will be executed immediately and disappears from the order book.

When selling, a limit order will only match the trade with the buyer when the market price is equal to or higher than the specified price. Therefore, what users know is that the selling price will not be lower than the price specified by the limit order. For example, if you place a limit order to sell 1 Bitcoin at $21,000, the limit order will not be executed unless the price of Bitcoin is over $21,000.

The selling price of a limit order cannot be lower than the current market price of the transaction, otherwise, it will be automatically converted to a market order transaction. For example, the current market price of Bitcoin is $20,000. However, you place an order to sell Bitcoin with a limit order of $19,500. It will automatically be matched with the buyer who offers the bitcoin price of $20,000 because the bid price on the order book is higher than the specified selling price. The transaction price will not be the set price of $19,500, and the transaction will be executed immediately and disappear from the order book.

A limit order transaction allows the buyer to buy at a price lower than the current market price, or allows the seller to sell at a price higher than the current market price. Therefore, a limit order is usually used for transactions that do not require high timeliness, which will reduce the purchase costs or increase the profits from the sales.

The difference between a limit order and a market order

The main thing that differentiates a limit order from a market order is the focus point. What a market order emphasizes is not the price but when the transaction can be completed. However, a limit order does not care when the transaction can be completed but requires that the transaction must be completed at a specific price.

Actually, we can see many traces of limit orders and market orders in our daily life. For example, now you travel to a tourist attraction where a special flavor of apples is abundant, and a nearby vendor sells an apple for $1. If you think this price is OK and want to buy and taste it, you are asking the vendor to buy it with a market order because you accepted the price and hope the deal will be executed now.

If you think $1 for 1 apple is expensive, but you still want to buy and taste it at a lower price, you can negotiate with the vendor and buy 1 apple for $0.50. At this time, you are asking the vendor to buy with a limit order, but the transaction may not be successful, because the vendor may not be willing to sell it to you at a lower price. But if the vendor wants to go home to rest after a period of time, you may get a chance to bug this apple at a special price when the stall closes.

We can see that the trade-offs of limit order transactions and market order transactions are different. Users of market order transactions can enjoy the certainty of executing the transaction immediately but give up the opportunity to trade at lower costs or higher returns. On the contrary, users of a limit order choose the certainty of trading at a lower cost or higher yield, but at the same time must give up the opportunity to execute the trade immediately.

Whether the limit order transaction can be successfully completed depends on the difference between the bid price and the market price. Just like the example above, you want to buy an apple at $0.10 but it is set to $1, or the vendor wants to sell a $1 apple for $10, in which you can know clearly that the cost of the transaction is low, or the vendor can determine the high profit when the transaction is completed, it may be impossible for this type of limit order to happen.

Other Applications of Limit Orders

A limit order is more flexible than a market order whose users can only passively accept the market price because the limit order adds conditions to whether the transaction occurs or not. In addition to placing a limit order on the order book, users can also initiate orders of different combinations, such as limit order + limit order, limit order + market order, etc. Many different trading strategies come into being by taking advantage of the price condition trigger function of limit orders. The most common uses are stop loss order and take profit order.

Stop-Loss Limit Orders

Stop Loss is a trading strategy, whose purpose is to close the position when the market trend is opposite to the opening direction, so as to protect the principal and prevent the loss from continuing to increase. Stop loss is very important for professional traders or traders of investment institutions who use leverage that will magnify profits and losses. If there is no set limit, only one wrong direction will cause the liquidation to explode and you will lose everything no matter how high the previous winning rate and how big the accumulated profit is.

A stop-loss order is a type of market order that will be triggered when a limit price condition is met. For example, you open a long position at $18,000, expecting that the price of Bitcoin will rise to $25,000 and close it out for profit, but you are also worried that Bitcoin will continue to fall below $17,000. At this time, you can place a take profit limit order at $25,000 and a stop limit order at $17,000 to avoid widening losses.

If the price of bitcoin does rise to $25,000, you can earn a spread profit of $7,000 per bitcoin when the limit order is triggered. However, if the price of Bitcoin does not rise as expected but falls to $11,000, you will only have to bear the loss of $1,000 per Bitcoin in the spread because the stop-limit order has triggered the stop loss at $17,000.

Take-Profit limit orders

Take Profit is also a trading strategy. It is designed to close a position when the market trend is in the same direction as the position was opened. Doing so will ensure that profits are not lost. Take a profit is also an important part of trading. Only by making continuous profits can the funds keep growing.

A take-profit order can be an ordinary limit order or a market order that is triggered when the limit price conditions are met. For example, if you open a long position when the price of Bitcoin is $18,000, and you expect the price of Bitcoin to rise to $25,000 and then close the position to make a profit, you can place a limit order at $25,000 to take a profit.

Subsequently, if the price of Bitcoin does rise as expected, but it doesn’t reach $25,000, but fluctuates around $24,000, you can protect your profits by placing a limit take profit order at $22,000 to make sure you can make profits when you are worried that an upward false breakout may lead to a subsequent downward true breakout.

If the price of bitcoin eventually reaches $25,000, you can earn a spread profit of $7,000 per bitcoin after the limit order is triggered. However, if the price of Bitcoin reverses and falls back to $18,000, you will still gain a profit of $4,000 per Bitcoin since the take-limit order has already triggered the take profit at $22,000.

Advantages and disadvantages of limit orders

You can benefit a lot by using limit orders to trade:

More favorable transaction rates

Limit order transaction is more beneficial to frequent traders or institutions with abundant capital. This is because they can reduce transaction costs because the handling fee rate charged for limit order transactions is usually cheaper than that of market orders.

More flexible time

In a market where the prices are changing rapidly, common traders, except for a full-time trader or an investment institution trader, are usually unable to continuously watch the market to find an appropriate price to trade. However, the limit order allows them to set conditions that will only trigger the order to buy or sell when the price reaches the target. That’s, the transaction can be executed even if they don’t pay attention to the price changes of the asset at all times.

More strategy combinations

As mentioned before, different combinations of limit orders and market orders allow users to plan different trading strategies to limit losses on each trade and lock in profits when profitable.

Better deal prices

A limit order will only be triggered to buy only when the price is equal to or lower than the set condition or to sell when the price is equal to or higher than the set condition. There may even be a positive slippage when the price fluctuates violently. For example, part of the buy limit order originally set at $20 is bought at $19.5, or part of the sell limit order originally set at $30 is sold at $31.

Users also have to pay attention to some disadvantages of limit orders:

Reduced chance of trading successfully

After a user submits a limit order to the order book, the price of the buy order must be lower than the current market price, and the price of the sell order must be higher than the current market price. It is very likely that you have waited for a long time and still cannot get a deal if the difference between the market price and the order price is large.

Besides, even though the market price has reached the set conditions of the limit order, it is also possible that the trade will fail if the buy or sell is still not executed. This is because the matching of the trade is made in chronological order. If there are too many users placing orders to buy or sell at the same price, there is a high chance that the eligible price has gone before the limit order can complete the transaction.

The price needs to be reset in due course

Once the limit order is released, it will always appear on the pending order list and wait for the transaction unless it disappears because the time expires or the user cancels it. If the user discovers that there may be a sharp rise or fall in one direction, the user needs to cancel or re-submit the limit order, so as not to find that his limit order has completed the transaction at a terrible price in the future.

Pending order funds are unavailable for other purposes

To ensure that the pending order on the order book is valid, the funds for the pending order will be locked after the user places a limit order, and the funds cannot be retrieved unless the order is canceled. For example, if you have $1,000 in your trading account and you use the $1,000 to buy limit orders on the order book, your $1,000 will be locked and temporarily unavailable. You can access $1,000 only after the order is canceled.

How to place limit orders on Gate.io?

Assuming that you expect to buy cryptocurrencies at a lower price than the current market price, you can place a limit buy order and specify the highest price you are willing to pay. You can follow the following steps to complete this trade:

Steps on Gate.io Web

1.Log in to your Gate.io account, and click “Trade” - “Spot Trading” in the homepage bar. Then, you can choose the standard version or the professional version. The following shows the standard version as an example:

2.Select a trading pair on the left side of the Spot Trading page. Here we take GT_USDT as an example.

3.In the buy and sell area below the K-line chart, you can set the “buy/sell” price, and the “buy/sell” amount or exchange amount, and then click the “Buy”/”Sell” button.

Note: The percentage (25%) below the quantity refers to using 25% of the account balance to place an order and the same for other percentages.

4.In the price movement section on the right (also called order book, or buy/sell order area), you can click the price to quickly set the “buy/sell” price.

5.Click “Confirm order” after you confirm that the order price and quantity are correct.

6.Then, you can view the pending order records in “Current Order” at the bottom of the transaction page. You can also click “Cancel Order” in front of the current order to cancel the order.

Steps on Gate.io App

1.Open the Gate.io App, log in to your Gate.io account, and click “Coins” at the bottom of the page to enter the “Spot Trading” page. Then, follow the detailed steps below:

① Select a trading pair;

② Select the order conditions on the “Buy/Sell” page, and then set the “Order Price” and “Order Quantity”;

③ Select a price on the price movement section on the right to set the order;

④ Enter from the K-line chart of the selected trading pair.

After you input the corresponding content as prompted on the page, click “Spot Buy/Spot Sell”.

2.Click “Confirm” after you confirm that the order price and quantity are correct.

3.Then, you can check the pending order records in “Current Order” at the bottom of the transaction page.

4.Click on the order to view the order details. You can also click “Cancel” below to cancel the order before it is filed.

Conclusion

Limit orders are a useful tool in crypto trading. It allows users to decide the price of the transaction as well as to devise different strategies by combining limit orders. The limit order will only be triggered when the price meets the conditions, allowing users to plan the profit, loss, and capital ratio of each transaction in advance. One of the most common functions of a limit order is to set the stop-loss and take-profit of a trade.

Users can benefit a lot from the use of limit orders. Generally speaking, users will be able to enjoy more favorable prices in limit order transactions. In addition, users don’t have to constantly monitor the price changes, which is surely friendly to users in a crypto market running 24/7 hours. However, the limit order can only guarantee the pending order but not the transaction, and the funds will be locked during the pending order and cannot be used freely. It is necessary for users to understand their own needs and purposes before choosing the most suitable trading method. Want to learn more about the different order types? Refer to this Gate Learn article: Understanding the Different Order Types.