Even when you’re sleeping, the cryptocurrency market is active.
Most cryptocurrency traders are torn between staying awake and tracking prices and sleeping like a normal human being.
We’ve all been there: realised we missed out on buying something when the price was low because we didn’t check the prices frequently.
So, how can you increase your profits and reduce your losses while trading cryptocurrencies without sacrificing your personal life – Enter Limit Orders.
Table of Contents
- What is a Limit Order?
- Types of Limit Orders: Where Can You Use Them?
- When is the right time to place a Limit Order?
- Benefits of Limit Order
- Risks of Limit Order
- Bottom Line
What is a Limit Order?
A Limit Order is a type of order that allows you to instruct your exchange to buy or sell a coin at a predetermined price. Even if you are unable to monitor market movements, you can execute crypto purchases and sales to maximise profits and minimise losses..
When you place a Limit Order, you are not buying the cryptocurrency right away. Instead, you will simply instruct your exchange to buy/sell a certain number of coins whenever the price of the cryptocurrency reaches the specified level.
Let’s use the purchase of a phone as an example. You want to buy a new phone, but it is far too expensive for you right now (say, $50,000). You’ve come to the right place!
You anticipate a sale that will allow you to purchase the phone at a reduced price (you’re hoping it will drop to $39,000). Imagine if you could simply instruct your seller to purchase your phone for you when the price reaches $39,999.
That, in essence, is a Limit Order.
A limit price is the price at which you want the exchange to transact on your behalf.
Note that the limit price is your anticipated price, which may or may not occur in reality, in which case the limit order will not be executed.
Types of Limit Orders: Where Can You Use Them?
Limit Orders are classified into two types: Buy Limit Orders and Sell Limit Orders. Let us examine them in depth.
1. Buy Limit Order
When you place a Buy Limit Order, you anticipate that the price of the cryptocurrency you want to purchase today will fall in the future. The online shopping example mentioned in the introduction is a prime example of this.
Note: If the market price does not fall to your limit price or lower, your order will remain unprocessed.
2. Sell Limit Order
On the other hand, you place a sell limit order when you have a cryptocurrency to sell and believe the price will rise in the future. In this case, you instruct your aggregator to sell it only when the price reaches a predetermined level (usually higher than the current prices).
Assume you purchased a dogecoin for $50 last year and have learned that Elon Musk will appear on Saturday Night Live next week. Prices are bound to rise as a result of this. Keeping this in mind, you instruct the Crypto app, your aggregator, to sell the coins if the price reaches 60 (because that is the highest you believe it will go). This is an illustration of a sell limit order.
When is the right time to place a Limit Order?
A limit order is, without a doubt, a future transaction. You should only place it if you have the time to wait. Consider all risks before placing your order – the price may never reach your anticipated price; the price may fall/rise further after you’ve placed your order, and so on.
Please keep in mind that you can place multiple Limit Orders at the same time to get the best of the average market price.
Benefits of Limit Order
Here are some of the reasons why you should use Limit Orders.
- It allows you to set the price at which you buy or sell cryptocurrency.
- Allows you to make excellent deals (if used correctly).
- It aids in the management of emotions such as Fear of Missing Out (FOMO).
- When used correctly, it can help you make more money.
- It enables you to trade like a professional in a volatile market.
Risks of Limit Order
The most serious risk of placing a Limit Order is that it will never be executed.
- You may be exposed to it if the cryptocurrency’s price does not reach the expected level (limit price).
- Even if the currency reaches your target price, there may be many pending orders to process ahead of yours.
- There is a problem with the system. (which is highly unlikely)
Will your order get canceled?
In general, they are not cancelled.
- They may, however, expire if you enter a price that is greater than the suggested limit.
- Your order’s validity has expired due to non-execution.
These orders are rarely cancelled due to system errors.
Limit Orders are an excellent tool for conducting trades. It does, however, have limitations, just like any other tool. It is only as good as the trader. You can reduce unexpected losses and increase profitability by making the best use of it.