What is a limit order in crypto, and how does it work?

By October 18, 2022October 25th, 20223 minute read
09 Blog How to place a stop limit order option 1

The world of finance is changing by leaps and bounds. The introduction of newer asset classes, such as crypto, is altering how we trade and invest, in addition to the classic investment instruments. Since crypto is still in a nascent stage, the market’s inherent volatility necessitates close monitoring by traders in order to capitalize on price swings. 

Utilizing limit orders in crypto helps one to have more control over trading activities. In order to play our cards correctly when trading, we should understand the different types of orders available. But first, let’s talk about limit orders.

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What is a Limit Order?

Using a limit order, traders can specify a maximum price at which they would want to buy or sell a coin. The limit order method works using the following if-else algorithm:

  •  If the market price of your investment in a crypto coin or other digital asset reaches the limit price, your order is carried out; 
  • If not, the order is canceled. 

The key benefit of using limit orders is that both buyers and sellers can select the desired price. When their preferred crypto reaches the target price, they can then make a trade even if they are unable to continuously monitor the market, staying one step ahead of other traders. Consequently, a limit order enables one to purchase or sell crypto at a specific or higher price. 

Traders use limit order in various situations. Some of them are:

  • The coin is a low-volume coin and isn’t frequently traded on the market. 
  • The trader is concerned that the price of a crypto coin is fluctuating a lot.
  • The trader doesn’t indulge in intra-day trading, hence, doesn’t have the time to keep a watch on the market. 
  • Some investors only employ limit orders when they think that the price of an asset will rise to the desired level.
  • The trader is trading a huge volume of coins at once. 

Drawbacks of Limit order

Limit order makes it convenient for traders to invest in crypto, but they have a few setbacks too. Here are some disadvantages of using Limit orders:

  • The order will not be filled if a willing buyer or seller does not meet the limit price within the allotted time frame. 
  • Additionally, time is crucial when placing limit orders. Each order placed in an exchange’s order book has a time stamp. In case of the same price, the order placed first takes precedence over the orders accepted later. 

How does it work?

There are two limit order types: sell limit orders and buy limit orders.

  • Sell Limit Order: When a trader places a sell limit order, they specify the lowest price they want the crypto coin to reach. The order will be activated only when the crypto price is equal to or more than the minimum price.
  • Buy Limit Order: Here, a trader establishes a limit they are willing to meet to purchase a stock. The order will be carried out only when the price of the crypto is lower than the predetermined price.

Investors should also consider the order’s expiration date while placing a limit order. Suppose a trader doesn’t have the time to keep a close eye on the market. In that case, they can find themselves buying or selling at a less acceptable price since a poor evaluation of market price movement will ultimately force the investor to underestimate the limit order. In order to stay updated with the constantly shifting market conditions, traders and investors should periodically examine their open limit orders.

Conclusion

Limit orders are a great trading instrument when a trader wants to purchase or sell a coin at a higher price. An investor can use it to maximize unrealized gains or reduce loss risk. It is a great option for investors who are patient and are looking to HODL. However, limit order doesn’t come without risk. You might lose out on a profitable opportunity if an order is not filled. Hence, traders should be aware of the pros and cons of all kinds of orders and strategize their moves carefully. 

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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