Market order
A market order is an order to buy or sell some financial instrument (currency for example) immediately at first available price. A trader will use this order if he wants to trade “right here and tight now” at whatever price is available.
Pros:
- this type of order guarantees that the order will be executed,
- this type of order guarantees that the order will be executed withing the shortest time possible.
Cons:
- market order may be placed only during active trading session and it cannot be postponed or delayed,
- this type of order does not guarantee the execution price, if the market is very volatile (example: news time) or there is low liquidity (example: roll over time) it is possible that this order will be executed at a price which is different from desired price.
Example:
During active trading session EURUSD is traded at 1.20000. There is no extraordinary activity on the market. When market order is placed it shall be executed immediately at 1.2000 or price very close to it, ex. 1.20001-1.20002.
If market news come out, price starts rising fast. When market order is placed, EURUSD can be quoted at 1.20000, but by the time it is executed it can be filled at a different price, for example 1.20010-1.20020. A trade will receive slippage 10-20 points.
Market order may be used at a time when a trader anticipates significant market move and wants to take a trade to either profit from large price movement or cut losses the soonest possible.
Limit order
A limit order is an order to buy or sell a financial instrument (FX pair for example) at a specific price or better. There is a BUY limit order and SELL limit order.
A buy limit order can only be executed at the limit price or lower.
A sell limit order can only be executed at the limit price or higher.
A trader will use Buy limit order if he wants to get into a trade if the price draws down from current price. Buy limit order allows to buy at a price, which is lower and better than current price.
A trader will use Sell limit order if he wants to get into a trade if the price goes further up from current price. Sell limit order allows to sell at a price, which is higher and better than current price.
Pros:
- this type of order allows to get into a trade at a better than current price,
- this type of order guarantees that the order will be executed at the requested or better price.
Cons:
- this type of order does not guarantee that the order will be executed.
Example:
During active trading session EURUSD is traded at 1.20000 and rising. It is anticipated to rise to 1.21000.
Buy limit order is placed at 1.19900 (100 points below current price). If the price goes down to 1.19900 or lower, limit order will be filled at 1.19900 or lower price. If anticipated growth in price continues and EURUSD reaches 1.21000, a trader will profit.
When limit order is filled at a price, which is better than requested, example buy limit order is filled at 1.19800 instead of requested 1.19900 (100 point difference), they say this order receives positive slippage, which may bring a trader extra profits in the event the trade goes on anticipated direction.
Market order may be used at a time when a trader anticipates market move in some direction, but a trader wants to take a trade at a better price to profit more.
However, if the prices never goes to predetermined level (if it does not go a bit down from current level for buy limit order as an example), this order will never be activated and filled.
Also if there are many other orders from other traders ahead of the trader to fill at the same price (for example, many other traders also want to take a trade at 1.19900), it is possible that there will be not enough liquidity to fill all orders even if the price reaches desired level, and limit order will not be activated.
