Before we start, let us define a buy limit order first. It is an order where a trader can buy an asset at a stated price or lower. Hence, there is an assurance that the trader will only pay the set price for the buy limit. It can also be lower, but nothing more than that. However, there is one thing that a buy limit order can’t assure a trader. It is the order execution or fills. If the asset never reaches that price, there is no way that the order can be filled, leaving the investor a missed opportunity.
Buy limit orders and execution
Some traders, mainly the new ones, miss out that their buy limit level should not be the bid price but the ask price. For instance, you are eyeing a stock. However, you wait for its price to decline to $60 before buying. If you place a buy limit order at f you place a buy limit order at exactly $60, the order will not execute even when the price hits $60. Why? It is because $60 is not the ask price but the bid price! It is what we mean when we say that most beginners miss this part. The price that they see on the market is the bid price and not the ask price.
Knowing the ins and outs of trading before anything else
It is okay to make mistakes in trading, especially when you are new. What’s not okay is going in the market when you are not yet knowledgeable and ready enough to bet your money. With that, a trader should always be knowledgeable of the present bid-ask spread, especially when a buy limit order is in mind. If the bid price hits lower than the given buy limit price, the order will not be filled should the ask price stay more than the given buy limit price.
The only way for the buy limit order to get filled is if the ask price hits lower than the buy limit price. Take note when we say “lower” because the order will not be filled if it stays strictly at the buy limit level and not below. If buy orders outnumber sell offers at that level, all buy orders at that price do not have a chance at getting filled.
We reiterate that traders who have buy limit orders in mind should be aware of the bid-ask spreads, especially when the trading situation is volatile. Be alert because even a very tight spread can widen multiple times, albeit temporarily, when there is a sudden and sharp movement in a volatile environment.
What sets buy limit orders apart from market orders?
A trader has the liberty to choose his preferred price in buy limit orders. These orders never initiate, let alone get executed unless it hits a certain amount. They are pretty helpful when avoiding certain risks like market volatility. This characteristic is what sets it apart from market orders. If there is a flash crash, a market order executes because it prioritizes the speed of execution above the price. Buy limit orders are more focused on the price than the speed of execution. However, their execution is more complex than market orders which makes the higher brokerage fee sensible.
Let us have a recap
Buy limit orders lets traders choose a preferred price and guarantees that they will only pay that or lower. The fill will only happen once the price hits lower than the desired price. The fill will not occur if the ask price will not hit lower than the specified buy limit price.