Limit order definition
A limit order is an instruction to your trading provider or broker that tells them to execute a trade at a more favorable price than the current market price. You can use a limit order to enter or exit a position.
Say, for example, that you have an open long position on Glencore stock, which is trading at $2.90. You decide that you want to take your profits if it hits $3.00.
$3.00 is a better price for you than $2.90 because you'll earn more profit from your position. So, you could use a limit order to tell your trading provider to sell your stock if it hits $3.00. Then, if Glencore moves to $3.00, your position will automatically close.
The opposite of a limit order is a stop. These execute a trade at a price that is worse than its current level and are a crucial part of risk management.
Buy vs sell limit orders
You can use limit orders to buy or sell a market. Using a sell limit order means that your trade will execute at a higher price than where the market is now. A buy limit, meanwhile, will execute below the market's current level.
For instance, if you didn't own Glencore stock but wanted to open a position if it drops to $2.80, you could use a buy limit order. You'd be telling your provider to buy shares at $2.80 – below the current price of $2.90, and a more favorable price to you because you'd pay less for the same stock.
Your limit order would never buy Glencore stock for more than $2.80. If the company never reaches that level, it would never be filled.