[David Waring]

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In our last lesson we continued our module on how to place stock trades, with a look at how to open a trade using a market order. In today's lesson we will continue this discussion, with a look at how to open a trade using a limit order.

Unlike a market order, which is sent to be executed at the best price available in the market at the time the order is placed, a limit order is sent to be executed at a specific price or better. The advantage of a limit order, is that you have price certainty, meaning that you know that the worst price where your order will be filled, is the price you specify in the order. If the market moves so that you would be filled at a price that is worse than the price that you have specified, then the trade will not execute. If however the market moves so that you would be executed at the exact price you have specified or better, then the trade will be executed.

To see an example of this, lets login to our ThinkorSwim papertrading platforms and place a trade using a limit order. If you have not done so already, I encourage you to hit the pause button and register for a free ThinkorSwim demo account using the link above this video, so you can follow along with us as well.

Once you have logged into the platform lets go ahead and type the ticker symbol for Citigroup in the symbol window which is the letter C, and then hit enter. This will populate the trade tab with the quote information for Citigroup. For this example lets say that we think that Citigroup is going to trade lower so we want to sell 100 shares of Citigroup stock to participate in the move. Because we are looking to sell, this time we will click on the bid price, which will bring up the order window just as happened with the market order we placed in our last lesson.

As you can see this time however it has populated to sell instead of buy, because we have clicked on the bid price to open the order window. As we are executing a limit order this time you can see that the order window now has a price which is fluctuating up and down in lockstep with the bid price in for Citigroup in the market. If you remember from our last lesson, when executing a market order there was no price here, and the reason why is because a market order is sent to be executed at whatever the best price is in the market. As we just discussed however, a limit order is sent to be executed at a specific price, so the ThinkorSwim platform defaults the limit price to float up and down with the bid price if you are executing a sell order and the ask price if you are executing a buy order.

If you would like to try and improve on the current price in the market by waiting for the market to move in your favor to execute your trade, you can use the arrow keys beside the price to set whatever price you would like for your limit order. When moving the rate you will notice that the padlock under the limit column moves from open to closed, which simply means that the platform is locking the price that you set for your limit instead of letting the limit order price float with the market, which is represented by an open padlock.

Go ahead and set the limit order price a few cents above the market and place the order by clicking the confirm and send button and then the send button in the confirmation window. Once you do this you should see the order show up in your orders window as a "working order" which means that it is waiting for the market to get to your price before executing. Remember that when placing a limit order it will only execute if the market is at the price you set or better. This means that a sell limit order will execute only if the price you set is at or lower than the current market price. Conversely, a buy limit order will only execute if the price you set is at or higher than the current market price.

Thats our lesson for today. In our next lesson we will look at how to close trades at the market as well as with stop and stop limit orders.

As always if there are any questions or comments please leave them in the comments section below, and good luck with your trading!

Limit Order Resources

Limit Orders
limit order -- Britannica Online Encyclopedia
Limit Order - Reuters Financial Glossary