Sometimes even the most experienced and seasoned traders can get mixed up in the terminology and forget which one does what exactly. This is going to be the main focus of our discussion in this article. Namely, the difference between a market order and a limit order.
They are both foundational orders in financial markets. But a market order is a more basic order for buy or sell which is issued by the trader and will almost always get filled immediately without any guarantees for the price. It is usually executed based on the best available price at the moment.
A limit order, on the other hand, provides the ability to the trader to specify the price at which they want their order to be executed. They usually set a high and low. A range to which the price of the order is limited so to speak.
But these are only rudimentary definitions. Let’s dive deeper together and see what a market order and limit order are and, more importantly, what their difference is.
What Is a Market Order?
As we mentioned above, a market order is a foundational order in all financial markets including the forex market. The reason it is considered as foundational has to do with the nature of such orders.
As the name suggests, a market order is a directive regarding the market price. So this means the broker is not limited in terms of the price set by the trader.
You as a trader can issue a buy or sell order of the market order type. And this will notify the broker that you intend to fill that order as fast as possible, whether it is a buy or sell, and you also do not really care about the price.
Not that you do not care. Of course price is the most important factor after all. But, rather, you have not set limitations with regard to price.
So the broker will, in turn, seek out to execute your order at market price, which is the price of the commodity, stock, or trading pair at the moment the order has been issued.
So market orders are simple orders that do not require much analysis on the part of the trader. You simply place your order for buy or sell and the broker will fill it as fast as possible with the currency market price.
Why Do Traders Use Market Orders?
Now you might ask yourself, if you cannot set any limitations with regard to price, then why would you use a market order at all?
But there is utility to every single order that exists in financial markets. They are there for a reason after all.
And the crucial utility for the market orders are their fast and reliable speed of execution.
The thing is, with many other orders, especially as they get more and more complex, the chances of your order being filled by the broker get narrower and narrower. This is because you define more preconditions for your order. So the broker will set out to find your requested conditions, but chances are given the market condition, those criteria will not be met and your order will get canceled.
Now this can be considered a serious loss especially when you want to purchase valuable shares or other assets that you want to purchase in a time sensitive manner.
But with a market order, it is pretty much guaranteed that your order will get filled. So if you want to execute your order with time sensitivity, then a market order is the way to go.
Now, let’s turn to limit orders.
What Is a Limit Order?
With the help of limit orders, traders have the ability to specify the maximum or minimum of the price that they want their order to be filled at.
So, naturally, they provide a higher degree of control over the price of orders. But there is of course always a tradeoff. You give something, you get something in return.
So what do you need to give up in order to gain the ability to have more control over the price of your order? The time or the possibility of your order being filled.
When you place a limit order and specify the price, either for a buy or sell order, then you need to wait for the threshold to be hit by the market. If the threshold is not hit, then the broker cannot fill your order and it will naturally be canceled.
Is price really that important that you should risk your order being filled at all? Let’s answer that question in the next section.
Why Do Traders Use Limit Orders?
We already mentioned that all market orders have their own unique utility. There is a purpose for all of them.
Now the purpose for limit orders can be found in more volatile markets. When you know prices are moving in a hectic way and it is hard to predict their stability, then limit orders can be useful.
In such situations, a market order can result in you paying a final price for your order that is way beyond your initial expectations.
But in the same situation, if you issue a market order, not only do you get to be in the control seat of the price, the chances are quite high that the price limit will be obtained.
Ultimate Showdown: Market VS. Limit Orders
Alright, so let’s get down to the crux of our discussion. The difference between market order and limit order.
The main difference between market orders and limit orders is their approach toward the market. The former allows for quick execution of order at the current market price thus providing you with a higher degree of assurance that you will get your order filled quickly, and the latter provides you with a chance to set your own price for the order, though lowering the chances of your order being filled quickly.
The advantages and disadvantages of each order have to do with the special situation of every trader and also their own perspective with regard to trading.
So, for instance, even though with market order you do not get to set the price, it is, however, much easier to issue such orders. So you do not need to know much about technical or fundamental analysis.
And in the case of limit orders, even though they might be more challenging to issue and to get the exact right tightness or width of your limit order, they do, however, provide you with the freedom to set your own prices.
Market order and limit order are both among the three of the main types of orders in financial markets. There are many other orders that are derived from these two orders. A market order, for buy or sell, will have your order filled by the broker at the current market price. And a limit order will provide the ability to the trader to specify the price of the order.