The purpose of setting up a limit order is to “lock in” profit should price move to a traders advantage enough. Without a limit, a position could potentially trade to very profitable levels, but still end at a lose if the profits are never locked in.

Limit Caveats

A frequent mishap with limit placement is when traders place their limits directly on key support/resistance levels. The rationale for this is understandable, support and resistance areas where price action usually stalls – thus if the markets moves to that level it may not break through. But it is not uncommon to see the market trade up to key support levels, stall before the level is reached, and then reverse back in the trader’s disadvantage. Often limit orders are placed to lock in profits before support or resistance levels are reached.

OCO – One Cancels the Other.

One Cancels the Other (OCO) orders are the norm with stop-losses and limits. With an open position, a trader may have attached a limit as well as a stop and trailing stop. After a position is closed by a limit, what is there to prevent the leftover stop from remaining, waiting to be executed? If they are OCOs, then when the limit is executed the stop will be canceled – if the stop is executed the limit will be canceled. This ensures there will be no ‘leftover’ orders after a position is closed.