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What Is the Difference Between Market Orders and Limit Orders?

March 8, 2024 | By

Being able to enter and exit the market efficiently is vital to sustaining long-term profitability. To achieve this goal, active futures traders use a variety of order types. Among the most popular varieties are market, limit, and stop orders. Read on to learn more about the difference between market order and limit order functionalities.

What Is a Market Order?

A market order is an order sent directly to the exchange by the trader. Once it reaches the exchange, it is filled instantly at the best available price.

Market orders can serve two functions: to open a new trade or to close an existing one. To open a new trade, a buy or sell market order is sent to the exchange, where it is immediately filled. A new bullish or bearish position is instantly opened, securing a long or short position in a market.

A buy or sell market order may also be executed to quickly exit an active long or short position. A buy market order is used to close out a short; a sell market order is used to close out a long.

The primary reason why traders use market orders is speed. If you need to execute a buy or sell order quickly, the market order is an ideal option. However, market orders may be subject to significant slippage, which is worth consideration. As we’ll see, precision is a key difference between market order and limit order attributes.

What Is a Limit Order?

A limit order is an order that rests at the exchange at a specific price point until executed. Limit orders are filled at the specified price or better.

Like market orders, traders use limit orders to enter and exit a market. However, the orders are placed in a queue at the exchange, where they wait until price reaches them. In this way, a sell limit order rests above price; a buy limit order rests below price.

When price action reaches the limit order, the order is executed at the specified price or better. Price improvement occurs when the limit order is filled at a better price than expected.

The principal rationale for using limit orders is precision. Limit orders mitigate slippage because they are executed at a determined price, a superior price, or not at all. If your strategy calls for exact market entries and exits, then the limit is the order of choice.

The Difference Between Market Order and Limit Order Executions

Market and limit orders have a few key differences. The four most important are:

  1. Speed: Market orders are executed immediately, whereas limit orders wait until price action reaches them.
  2. Precision: Limit orders are filled at an exact price point. Conversely, market orders are executed at the first available price.
  3. Slippage: Market orders can be subject to significant slippage; limit orders aren’t.
  4. Skipped: If a designated price isn’t available, a limit order can go unfilled and be passed over. Market orders are immediately filled and guarantee execution.

Strategically, the difference between market order and limit order functionality is vast:

  • Market: Market orders are great for momentum trades, breakout trades, and any strategy that doesn’t rely on precision.
  • Limit: Limit orders are best for buying or selling pullbacks in price, counter-trend trades, and reversion-to-the-mean

Do You Know Your Futures Order Types?

Understanding how to buy and sell is a critical part of making money trading futures. A great place to begin is by grasping the difference between market and limit order operations. After that, you’ll be ready for more complex order types like the trailing stop, multi-bracket, and one-cancels-the-other (OCO).

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