What is a Limit Order?
A limit order sets the maximum price you are willing to pay when buying, or the minimum price you will accept when selling. Unlike a market order, it will only execute at your specified price or better. If a stock is trading at $100 and you place a buy limit order at $95, the order will only fill if the price drops to $95 or below.
Practical Applications
Limit orders are essential for managing entry and exit points. A common technique is placing a limit buy order 3-5% below the current price to capitalize on short-term pullbacks. For example, if you want to buy shares of a company trading at $200, setting a limit at $190 lets you wait for a dip without constantly monitoring the market. Most brokerages allow limit orders to remain active for up to 90 days (good-till-cancelled).
Key Considerations
The primary risk of limit orders is non-execution. If a stock rallies without pulling back to your limit price, you miss the move entirely. In strongly trending markets, being too aggressive with limit prices can mean sitting on the sidelines. A balanced approach is to use limit orders for planned entries while keeping market orders available for time-sensitive situations.