Most crypto traders face this dilemma – stay awake and track prices or sleep like a normal human being.
We’ve all been there; realized we’ve missed out on buying something when the price was low because we forgot to check the prices often.
So, how can you increase your profits and reduce losses while trading in cryptocurrencies without having to give up on your personal life – Introducing Limit Orders.
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What is a Limit Order?
A Limit Order is a type of order that lets you direct your exchange to buy/sell a coin at a specific price. You can execute crypto purchase/sales to maximize profits and minimize losses even when you cannot monitor the market moves.
When you place a Limit Order, you will not be buying the crypto immediately. Instead, you will simply be instructing your exchange to buy/sell a certain number of coins whenever the crypto touches the specified price.
Let’s draw parallels with buying a phone. You want to buy a new mobile phone that’s way too expensive for you right now (think ₹50,000). You’re in luck!
You anticipate a sale coming up that could let you snag the phone at a discounted price (you’re hoping it drops to ₹39,000). Now, imagine if you could just instruct your seller to buy your phone for you when the price hits ₹39,000.
That, in essence, is a Limit Order.
A limit price is a price at which you want the exchange to transact for you.
Note: The limit price is your anticipated price and may not happen in reality, in which case, the limit order won’t get executed.
Types of Limit Orders: Where Can you Use Them?
There are two types of Limit Orders, i.e., Buy and Sell Limit Orders. Let us understand them in detail.
1. Buy Limit Order
You place a Buy Limit Order when you anticipate that the price of crypto you want to buy today may drop in the future. The online shopping example we spoke of in the introduction is a perfect 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 flip side, you place a sell limit order when you have a cryptocurrency to sell, and you think that the price might increase in the future. In this case, you tell your aggregator to sell it only when the price reaches a certain point (usually higher than the current prices).
Imagine you bought a dogecoin for ₹50 last year, and you’ve heard that Elon Musk will make an appearance on SNL next week. Prices are bound to go up thanks to this. Keeping this in mind, you tell CoinSwitch, your aggregator, to sell the coins if it reaches ₹60 (because that’s how high you think it’ll go). This is an example of a sell limit order.
When is the right time to place a Limit Order?
A limit order is, by all means, a future transaction. You should only place it if you can wait. Consider all risks before you place it – the price may never reach your anticipated price; the price may fall/rise more after you’ve placed the order, and so on.
Note: You can place several Limit Orders at the same time to get the best of the average market price.
Benefits of Limit Order
Here’s why you should use Limit Orders.
It gives you control over the price at which you buy or sell crypto.
Enables you to make great deals (if used correctly).
It helps you keep emotions like Fear Of Missing Out (FOMO) in check.
It helps you make better profits if used well.
It helps you trade like a pro in a volatile market.
The most significant risk of placing a Limit Order is that your order may never get executed. You may be exposed to it when:
The price of the crypto does not touch the expected price (limit price).
Even if the currency touches your expected price, there may be many pending orders to process before yours.
There is a system glitch. (which is most unlikely)
Note: If your limit order does not get executed within the set time, the order lapses.
Will your order get canceled?
Generally, they don’t get canceled.
However, they may lapse if:
You enter a price outside the suggested limit
The validity of your order expires due to non-execution
Very rarely, these orders get canceled due to system errors.
A Limit Order feature is an excellent tool for conducting your trades. Still, like any other tool, it has its limitations. It is only as effective as the trader. If you make the best use of it, you can curb unexpected losses and increase profitability.