Demystifying Order Types: Market Order vs. Limit Order

If you experience a significant amount of slippage on your positions there are a few things you should know:

First, check with your broker to see if they house the orders on the exchange or on their own servers. If you’re trading futures using Infinity Futures you’re set, they do. Make sure you are using a reliable futures broker.

Second, know the difference between market and limit orders and which situations they are best called for. Knowing the difference will help you get better fills, see less slippage, and take fewer stop outs.

What Are Market Orders?

These orders are great for exits, but dangerous for most entries. This is because a market order is an order to buy or sell at the market, whatever that current price may be. We all know that the markets move incredibly fast so when you place a market order or click the join bid/ask you are essentially throwing your hands up in the air saying “I don’t care at what price I get filled.”

Is there a better option?

What Make Limit Orders Different?

Yes. The way to get better fills is to use an order type foreign to most traders, limit orders. This ensures that you will get filled at your price or better because a limit order is instruction to do just that, “buy or sell at the price you select OR BETTER.” This means you cannot get filled for anything worse than where you place your order.

Market Order vs Limit Order

When to NOT Use Limit Orders

There is one instance that you would not want to use a limit order, when placing stops. A stop order is saying, “When price touches this level I want to close out my position at the market.” For most order execution platforms a stop order is by default a market order.

If you were to use a stop limit order and price were to quickly move through your stop price, you would remain stuck in the position. Think about it. That limit order is saying, “I want to get out at this price or better” so if you’re long with a stop below you and the market quickly moves through your stop limit order, the order will stay active and not fill you, very dangerous.

Tips for Breakout Traders

If you are the type of trader who likes trading breakouts, instead of waiting for price to breakout and then clicking the market button consider using buy stops and sell stops. This is one instance where it IS okay to use market orders for your entry.

Example of Buy StopPlacing a stop just above the break out point where you would like to enter will push your order into the market at the point that the market breaks your level.

While this order is a market order, placing it well in advance will help reduce slippage because most platforms use a FIFO, (first in, first out) method.

This means if you  place your order sooner than the next trader, you will be filled first. If you wait for that breakout and then hit the market button you will be last in line.

 

Tips for Traders Using RetracementsExample of Limit Order

This is where the power of limit orders really shines. If you’re the type of trader who likes to buy or sell when price has retraced of its highs or lows, using a limit order will ensure that you will get filled at your price or better.

Waiting for price to retrace can help reduce the number of stop outs you take. The reason being, you are not impulsively jumping in at highs, you are waiting for that pullback in the larger trend and as that counter trend trade loses steam, you enter in anticipation that the market will resume in the current direction.

Using Limit Orders to Reduce Impulse Trades

In my Traders Expo talk on “Costly Trading Mistakes” I talk about the dangers of impulse trading (here’s the re-recorded video presentation). Limit orders can help reduce impulse trading because you are identifying and setting your order well in advance.

One con about using limit orders is that if price does not go beyond your order you will not be filled. This however, can be looked at as a good or bad thing.

Limit orders ensure you get filled at your price or better, and I’d rather trade in this way missing a few trades, than taking stop out after stop out by impulsively clicking the market order button.

What’s your view? Do you use market or limit orders, and why?

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About Tim Racette

Tim is a full-time trader in the futures and stock markets and founder of EminiMind.com. He is also a Chicago-land native, competitive mountain biker, adventurer, and ASU Sun Devil.

3 Responses to “Demystifying Order Types: Market Order vs. Limit Order”

  1. What’s your view? Do you use market or limit orders, and why?

  2. so some1 trading cvlt and ffiv on dec 21 should’ve used a buy stop order to catch the breakout? what price would u have set the buy stop order price at 4 cvlt and ffiv? would a buy stop order 4 dmnd on dec. 22 at @27.60 have caught the move? a buy stop order 4 mjn on dec. 22 at $62 or $63 caught the move?

    • I look at the larger trend first and foremost so using the CVLT example I would actually be looking to take a long over the high of the 12/15 hammer. You can use $0.10 if you like, placing a buy stop over the high in this case. Then you could trail your stop below the low of each prior day’s candle on the daily (stopping your out on the 21). At this point you could close the position or take the trade in the opposite direction. A simple buy stop over highs and for long entry’s and sell stop below lows for short entry’s works well on daily charts.

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