Trading the stock market comes with risk, but it is possible to manage that risk.
David Jaffee of BestStockStrategy.com pivoted his Wall Street investment banking experience into a lucrative options trading career.
Through years of trial and error, David Jaffee has learned how to mitigate risk when trading.
If you want to know the best options trading strategies, keep reading to learn more about limit orders and how they can help manage risk.
Buy and Sell Limit Orders
Limit orders are used by traders when they want to control the prices at which they trade. As a type of order, you can either buy or sell a limit order.
When you buy a limit order, the order is carried out at the set limit price or a lower price than the set limit.
The price of a buy limit order is guaranteed. However, it is not guaranteed that the limit order will be executed.
The security price of the buy limit order must meet the qualifications of the order, or the order will not be filled.
When you sell a limit order, the order is carried out at the set limit price or a higher limit price.
While limit orders can result in missed opportunities, they guarantee that, if the trade fills, you'll receive your specific price, or even a better price.
Sell Limit Order Example
A trader can set a limit of $15 to sell shares. The trader will only sell those shares if the price is $15 or higher.
This technique works well if a trader thinks shares of a current stock are trading too low. They can set a specific number of shares to sell at a specified price.
Limit Buy Order Example
If a trader wants to buy a stock but thinks it is currently trading too high, they can use a buy limit order.
The trader can specify a number of shares to purchase when the stock is at or below a certain price.
The buy limit order will be open until the stock reaches the trader’s limit or they cancel the order.
Limit Order vs Market Order
If you are looking to execute a trade quickly, you can place a market order.
Market orders execute trades at the current market price, and the trader cannot control the price at which they buy or sell shares.
For traders who value speed or need to quickly buy or sell shares, a market order is ideal.
However, if you want to control the buy or sell price limit of your shares, you need to use a limit order.
Traders with patience can earn considerable revenue by using limit orders over market orders.
Also, market orders are very dangerous with low float stocks.
What is a stop order?
You can get even more specific with your trades by placing a stop order.
Like a limit order, you do not trade at the current market price. Instead, a stop order is not seen by the market.
When the price reaches your stop price, then the stop order is triggered and becomes a market order.
The market can see a limit order, and it will only be filled if sellers choose to meet your limit price.
Stop-Limit Order Example
A stop-limit order combines both the stop price and the limit price.
When you place a stop-limit order, you can buy or sell shares at a specific stop price.
Stop-limit orders can help protect you if your forecast for a stock turns out to be incorrect.
You can also have the same stop and limit prices depending on the situation.
However, it is important to remember that stop-limit orders do not have fills or partial fills.
Your stop price might be reached, but your limit price may not be available.
Stop-limit orders also depend on liquidity. Your limit price may be available after the stock price is triggered, but you can suffer losses if there is not enough liquidity.
What Does David Jaffee Use When Trading
I use only limit orders.
I try to keep things as simple as possible.
Limit orders are ideal because it ensures that you'll receive the price you want.
Additionally, when combining a limit order, and a Good 'til canceled (“GTC”) time duration, I'm able to place an open order to close out winning trades automatically.
For example, let's say that I sell an option and collect $6 of premium, or $600 per contract. I can submit a Buy to Close limit order, with a Good-'til-cancelled ("GTC") duration, and once that contract is trading at my limit price, the trade will automatically close out so that I reduce my risk while keeping my profits.
Limit orders also help ensure that you receive adequate premium in stocks with wide bid-ask spreads.
As a result, I always use limit orders.
Learn More About Limit Orders
If limit orders, market orders, and stop orders seem confusing, there is an easy way to sort it all out.
David Jaffee offers a comprehensive online options trading course to teach you how to trade profitably.
As one of the best options trading coach, you can trust David Jaffee to teach you how to minimize risk while maximizing profit.
Instead of encouraging his students to trade too often or too big, David Jaffee preaches patience with the safest options trading strategy.
Learn more about limit orders and receive more than $400 worth of free training at BestStockStrategy.com.
Frequently Asked Questions (FAQs)
What Is a Limit Order in Trading, and How Does It Work?
A limit order is a direction given to a broker to buy or sell a security at a specific price or better. It is a way for traders to execute trades at their desired price while protecting them from receiving an inferior fill price.
What does limit order mean?
A limit order is an order to buy or sell a security at a specific price. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher.
What is a stop limit order?
A stop-limit order is a conditional trade over a set time frame that combines the features of stop with those of a limit order and is used to mitigate risk.
Are market orders bad?
Traders can receive inferior fills when using market orders.
Limit orders protect traders, especially when trading low-float stocks with wide bid-ask spreads.
What is the best order type when trading options?
Limit orders are the best order type to use when trading options.