Use Limit Orders to Exit Positions for Better Control
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Limit orders offer control over exit prices but may remain unfilled in illiquid markets. Using a combination of market orders, multiple exit signals, or trailing stops can help ensure better exits.
When exiting a position, many traders prefer to use limit orders to avoid slippage and control the price at which they exit. However, this can sometimes cause issues, especially if the price doesn’t reach your limit, leading to unfilled orders. Here are some tips and considerations when using limit orders to exit trades.
The Trade-Off Between Limit and Market Orders
• Limit orders offer more control by specifying the exact price at which you want to exit, reducing slippage.
• However, if the limit price is too far from the current market price or liquidity is low, your order may not fill, leaving you stuck in the trade.
Many traders in the TradersPost community recommend using market orders for exits, especially in fast-moving or illiquid markets, to guarantee you exit the position, albeit with the potential for more slippage.
Managing Slippage and Liquidity
If you trade thinly traded assets like small-cap stocks or certain futures contracts, slippage can be significant when using market orders. Using a limit order helps avoid this, but you must ensure the limit price is reasonable, or you risk missing the exit entirely.
For illiquid assets, some traders try to average out of positions with multiple limit orders. This means:
• Placing several smaller exit orders at different price levels over time to improve the chance of getting filled at a favorable price.
Alternatives to Limit Orders
• Trailing stops: Some traders use trailing stops as a dynamic exit strategy, allowing them to capture more profits as the price moves in their favor while still locking in a portion of their gains.
• Multiple Exit Signals: You can set multiple limit orders or exit signals in your strategy, adjusting each to different price levels. This increases the likelihood that at least part of the position will be exited at favorable prices.
Conclusion
While limit orders provide control over exit prices, they may not always fill in fast-moving or illiquid markets. Combining market orders, multiple exit strategies, or even trailing stops can help balance control and the need for a timely exit.