What is a limit order?

A limit order, or as it is also known as a "limit order", is a detailed bid that a trader submits to an exchange, setting the maximum or minimum price at which he is willing to buy or sell an asset. It is like a bid in an auction, where the bidder indicates the price he is willing to pay for an item. But in the case of an exchange, that order remains active until the conditions are satisfied, or until the trader himself cancels it.

When submitting a limit order, the trader specifies not only the price at which they are willing to buy or sell cryptocurrency, but also the amount of assets they wish to buy or dispose of. When the market price matches the price specified in the order, the exchange automatically triggers the order execution process, providing the trader with a trade at his or her desired price - or even better, if possible.

Using limit orders, traders can buy cryptocurrencies at below-market prices or sell them at above-market prices. This gives them more control over their trades and allows them to get better terms in the market.

1. Limit Order Price: Here you set the price at which the order will be executed.
2. Balance of trading account: Here you can see your balance in your chosen trading pair.
3. Number of Assets: Here you specify the number of assets you plan to buy or sell.
4. Asset quantity (slider): This is another way to specify the amount of assets to buy or sell, but instead of an absolute number, you specify a percentage of your current balance.
5. Amount of money: Here you specify the amount you plan to spend on buying the asset (when buying), or the amount you will receive when selling the specified amount of assets (when selling).
6. Buy/Sell Button: When you click this button, your order is sent to the order book, waiting its turn for execution.

Crypto exchanges offer traders several types of limit orders, each of which has its own characteristics:

• Buy limit order (buy limit order): In this case, the trader sets a price limit at which he wants to buy the cryptocurrency.
• A sell limit order (sell limit order): Here the trader sets the price limit at which he is ready to sell the cryptocurrency.
• Stop limit order: This is a special type of limit order, which is activated only when the price reaches a specified level. This order consists of two parts: stop price and limit price.

There are a number of key differences between limit and market orders based on their execution and guarantees:

• Limit order: The trader sets a certain price in advance at which he wants to buy or sell the cryptocurrency. Such an order guarantees execution at that price or a better price, but does not promise instant execution.
• Market order: This order implies an instant purchase or sale of a cryptocurrency at the current market price. Such an order provides immediate execution, but does not guarantee a specific execution price.

Thus, the main difference between limit and market orders is the balance between execution guarantee and execution price control.

Limit orders are an important element of trading strategy, offering traders more control over their positions in the cryptocurrency market and other assets.

Market entry strategy: A trader sets a limit order to buy a cryptocurrency at a price below the current market price. If the price reaches the specified level, the order is automatically executed, allowing the trader to enter the market at a profit.

Exit strategy: The trader sets a limit order to sell the cryptocurrency at a price higher than the current market price. When this price is reached, the order is executed, the trader sells his cryptocurrency at a profit and exits the market on favorable terms.

Traders also use limit orders as a means of protection against adverse price fluctuations. If a trader fears a sharp drop in the price of a cryptocurrency, he can set a limit order to sell below his entry price. In the event of a significant price drop, that order will be executed, which will help minimize losses.

Limit orders have a number of advantages over other types of orders on cryptocurrency exchanges:

• Optimal prices: Limit orders allow a trader to specify a specific price at which he intends to buy or sell a cryptocurrency. This way, they can help the trader get a better price compared to market orders.
• Full Control: Limit orders give traders full control over the price of a trade. He can choose the best price level to maximize profits or minimize losses.
• Flexibility: Limit orders give traders the flexibility to manage their positions in the market. A trader can set a sell limit order to protect his position or a buy limit order to enter the market on more favorable conditions.
• Avoiding Slippage: Limit orders help avoid slippage when a trade is executed at a different price than specified. If a trader is using a market order, the price can change while the order is being processed, which can lead to unwanted losses. A limit order, on the other hand, guarantees execution at a specified price.
• Low commissions: Some crypto exchanges offer reduced commissions for limit orders, making them more profitable for traders.

In general, limit orders offer the trader more favorable conditions than other types of orders, and allow him to manage his positions in the market more effectively.

Despite the many advantages, limit orders also have some disadvantages:

• Unguaranteed Execution: A limit order does not provide guaranteed execution. If the price does not reach the specified level, the order will remain unexecuted and the trader will either have to change the price of the order or cancel it and set a new one.
• Missed opportunities: If the price changes quickly, a limit order may miss a trade opportunity because the price may not reach the specified level.
• Risk of Loss: If a trader sets too aggressive a price for a limit order, the trade may fail to execute, which could result in a loss of profit or even a loss.

A cryptocurrency exchange limit order is a powerful tool for traders to control the price of buying or selling cryptocurrency. It allows a trader to accurately determine the desired price for a transaction, protects their capital and sets specific profit targets. The use of limit orders is an important element of effective crypto exchange trading.

It is important to note that a limit order is an effective tool in professional hands, but it is also a risk in the hands of inexperienced traders. Beginners often make mistakes when working with limit orders, forgetting to set a stop-loss or cancel the order if the trading idea is no longer relevant. 

This type of orders has obvious advantages, but not every trader uses them, because everything depends on the individual trading system of each trader.

If you want to learn how to use limit orders for effective trading on the crypto exchange, sign up for cryptocurrency trading training at the Cryptology trading school.