Limit Order

A limit order is a type of order used in trading to buy or sell an asset at a specified price. It gives traders more control over the price at which their trades are executed and minimize slippage, as opposed to a market order, which executes at the best current market price.

It is placed to buy an asset at a price below the current market price or to sell an asset at a price above the current market price, based on the trader’s specified price.

A buy limit order will only be executed at the limit price or lower. For example, if a stock is trading at $50 and a trader sets a buy limit order at $48, the order will only execute if the price drops to $48 or below.

A sell limit order will only be executed at the limit price or higher. For instance, if a stock is currently trading at $50 and a trader sets a sell limit order at $52, the order will only execute if the price rises to $52 or above.

Limit orders can be categorized into two main types based on their purpose:

1. Entry orders: used to open a new position in the market. They allow traders to set a specific price at which they want to enter a trade;
2. Closing orders: used to terminate an existing open position. They specify the price at which a trader wants to close out their trade.

One of the advantages of limit order is a price control: it allowed traders to specify the exact price at which they are willing to buy or sell an asset. This gives control over the entry and exit points.

A limit order also protects the trader from slippage, which can occur with market orders when there's a significant price difference between the expected and executed price. With a limit order, the trade is executed only at the specified price or better.

One of the biggest downsides of limit orders however is that they may not be filled if the market price doesn't reach the price that was set. This means the trader could miss out on the trade entirely if the asset doesn’t hit their target price.

In some cases, especially in illiquid markets, a limit order may be partially filled. This means only a portion of the order is executed at the limit price, resulting in the trader holding a smaller position than initially intended.

In summary, limit orders are great tools for strategic traders who value price control and are willing to wait for the market to meet their conditions. However, they may not be suitable for those who need quick execution or want to guarantee a trade in volatile or rapidly moving markets.