Based on best practices following is a quote from the reference link
In case of scenario where we have a definite path to lookup (e.g. /content/geometrixx/home/, under home say we have 500 pages). We can follow following approaches
Which one is better in this case and why it is recommended to avoid queries and use traversing instead?
They stated when the node set is small it may better to iterate through the JCR Nodes. A larger node set, its much better to set up OAK indexes and query. See , 
1. Oak Queries and Indexing
2. GEMS Session on OAK Index
Thanks smacdonald2008 for response.
Is there a recommendation for the limit that Adobe recommends e.g. upto 500 nodes Traversal is better, more than that use indexes and queries.
Only best practices for Querying is -- Best Practices for Queries and Indexing
I am pretty sure there is no hard limit. It what makes sense. In the case of 500 nodes - its too large for iterating.