December 20, 2005
Market Order or Limit Order
Position, swing or day traders should know when to use market order and when to use limit order.
Depending on the stock you want to trade, your approach of taking order should be different.
Limit orders let you enter a position at a price you define, your order will not be always filled, while market orders are always filled (must be some liquidity) but generally at a higher price.
Use market order :
- When the stock you want to trade are moving quickly, you can have an advantage using a marketorder in such condition, with a limit order you probably will miss a big part of the move.
- High liquid stock : Risk of slippage is near zero, so its better to enter quickly a position with a market order.
- If your broker charge higher commission for limit orders.
- When you have a big size order and you see a block trade in level II that can absorb your order.
Avoid using market order :
- For very illiquid stocks, you don't want to get a very large slippage.
- If you want to get a stock at a discount price and don't mind if you miss the trade.
Same rules can be applied for market stop orders and limit stop orders.
But for stop limit orders, you should monitor your orders because sometimes a stock will drop below
your limit stop orders and your stop will not be executed.
Personally, i use only market stop orders, so i can be sure that i get out of the stock.
- If you have a big size order and want to get completely filled, instead of putting a market order which can make the stock price move quickly upside, put a limit order at few penny higher than the ask price. You will get filled at a better price than using market order.