Limit Orders in Day Trading

Stock, commodity, options, and currency traders commonly seek profitable day trading strategies. The trader may seek to follow trends, trade within established ranges, or scalp for profits throughout the day. One thing is universal to all and that is the use of limit orders in day trading. Limit orders in day trading protect the trader against excessive loss and limit orders serve to preserve profits in volatile markets.

What Is a Limit Order?

Traders use limit orders in day trading to insure that they do not buy a stock, commodity future, or currency at any more than the precise price that they specify. Likewise when selling a trader uses limit orders in day trading to make sure that they do not sell except at a specified price. When investors use limit orders they may set the limits in such a way that the order is never filled. Or, the market might gap up or down at the start of the trading day and overshoot their specified upper or lower limit. When using limit orders in day trading a trader sets his limits, typically called stops, so that he will take a profit when the equity moves up a reasonable amount. And he will set his lower stop so that he will exit the trade with a reasonable loss even if the market falls dramatically. Traders may constantly reset their limit orders in day trading when they are trend following in day trading. They will raise their sell limit as the equity goes up in price and also raise their trailing stop so that even if the price falls they will make a profit compared to where they entered the trade.

There are variations on the theme of limit orders in day trading. One can use all or none or fill or kill orders as well as standard limit orders. In an all or none order the entire order must be filled or not filled at all. A fill or kill order specifies that the order be filled on the first try or cancelled. Both of these variations are commonly used by investors who are waiting for a specific move in the stock market and who are willing to wait days and even weeks for an order to be filled. They have little or use in limit orders for the day trader typically stays at his work station and pays attention to the market. He uses limit orders only because he trades in small increments in a fast moving market.

Avoiding Loss and Guaranteeing Profits

Limit orders in day trading are used to limit losses from a falling market and guarantee profits in a rising one. In each case the trader decides how much profit he can reasonably expect from current market conditions. He sets his upper stop. Then he decides how much loss to accept before bailing out of trade. If he sets his stops too close together he will likely leave the trade quickly simply due to normal price fluctuation. If he sets his upper stop to high the market may reverse before getting there and if it sets it too low he may accept substantial losses on a bad trading day. Smart traders typically move their stops as a trade progresses and avoid letting greed or fear drive their trading. Whether a traders seeks to profit from the news in day trading or adopt a specific trading strategy the use of limit orders in day trading is mandatory.