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  • Writer's pictureGlobal MoonXBT

Limit Order (Understanding Spot Trading)

Updated: May 17, 2022

What is a Limit Order?

Are you finding it difficult to decide which order type to use when buying bitcoin (BTC) or ether (ETH)? Different order types can affect your trades in different ways, so it’s crucial to understand the distinctions between them before you place an order. If you’re looking for greater control over your trades, you can consider using limit orders to cap the buying or selling price of a coin.

Limit order definition

A limit order is an order with a specific buy or sell price. To place a limit order, you need to set a maximum or minimum price you’re willing to buy or sell an asset. Your order will then be placed on the order book and will only be executed if the market price reaches the limit price (or better).

Unlike market orders, where trades are executed instantly at the current price, a limit order gives you more control over the execution price. As limit orders are automated, you don’t have to watch the market 24/7 or worry about missing a buy or sell opportunity while you sleep.

However, there is no guarantee that your limit order will be executed. If the market price never reaches the limit price, your trade will remain unfilled on the order book. Typically, a limit order can be placed for up to a few months, but it depends on the crypto exchange you are using.

How does a limit order work?

When a limit order is submitted, it will be placed on the order book immediately. But It won’t be filled unless the coin price reaches the specified limit price (or better). For example, you want to sell 10 BTC at $600, and the current price is $500. You can place a BTC sell limit order of $600. When the BTC price reaches the target price or above, your order will be executed depending on market liquidity. If there are other BTC sell orders placed ahead of yours, the system will execute those orders first. Your limit order will be filled afterward with the remaining liquidity.

Another thing to consider when placing a limit order is the order’s expiration date. In general, limit orders can last up to 90 days. Unless you watch the market closely, you might end up buying or selling at a less desirable price due to market volatility. For example, the current market price of BTC is $500, and you placed a sell limit order of 10 BTC at $600. After a week, the price of BTC surged to $700. As the market price has crossed the limit price you set, your order was executed at $600. In this case, your profits were limited by the target price you placed a week ago. Therefore, it is recommended to review your open limit orders from time to time to keep up with the ever-changing market conditions.

Limit orders are GTC (Good Till Cancel) mode, i.e. valid until canceled, meaning that the transaction of the order placed by the user will always remain open until the order is filled or until the user manually cancels the order. A GTC order can be canceled at any time before it is filled, and the remaining unfilled portion can be canceled after it is partially filled. This strategy is suitable for traders who have an exact buy or sell price target and the current market price has not yet reached the expected level. Unlike the stock market where orders are automatically canceled at the end of the trading day, the digital currency market operates 24/7, so the GTC strategy is also the default option for limit orders on digital currency trading platforms.

Maker only (Post only): It will not be filled immediately in the market, ensuring that the user is always a Maker and if the order will be filled immediately with an existing order in the market, then the order will be canceled.

When to use a limit order?

You can use a limit order when:

  • You want to buy at a specific price below the current market price, or sell at a specific price above the current market price;

  • You are not in a hurry to buy or sell immediately;

  • You want to lock unrealized profits or minimize potential losses;

  • You want to split your orders into smaller limit orders to achieve a dollar-cost-averaging (DCA) effect.

Keep in mind that even if the limit price is hit, your order might not always be filled. It all depends on market conditions and overall liquidity. In some cases, your limit order might only be partially filled.

What is the Advanced Limit Order?

Advanced limit order offers 2 more order options than a regular limit order, including “Fill or Kill” and “Immediate or Cancel”. The regular limit order has been defaulted as “Good till Canceled”.

1. Fill or Kill: it makes sure the buy/sell order is executed or canceled entirely without partial fulfillments.

2. Immediate or Cancel: requires all or part of the order to be executed immediately, and any unfilled parts of the order are canceled.

For example, if a user wishes to buy BTC and the order book is shown as the below screenshot:

  • If the user selected the “Fill or Kill” option, set the buy price as 00 and the order amount is 300 BTC, as the total amount on the order book is only 266 BTC (1+1+8+100+156), the order amount is not fulfilled (300-266=34 BTC) and will be canceled entirely. But if the user only ordered 200 BTC, the order will be executed accordingly;

  • If the user selected the “Immediate or Cancel” option, set the buy price as 00 and the order amount is 300 BTC, as the total amount on the order book is only 266 BTC (1+1+8+100+156), 34 BTC (300-266) could not be fulfilled, the order will only execute with 266 BTC and cancel the unfulfilled 34 BTC.

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