Market order vs limit order: what are they and what are their differences?
Understanding what a market order and limit order are, and their differences, is essential to any successful trading strategy. Dive into market orders vs limit orders, their pros and cons and how to place them on our platform.
What's on this page
What is an order?
An order is a request by a trader to a broker to place a trade on a financial instrument, such as shares, forex, indices or commodities – usually online or over the phone. There are different types of orders, but let’s look at two: market orders and limit orders.
What is a limit order?
A limit order is an instruction to a broker to place a trade at a specific level that’s typically better than the current market value. In other words, the maximum amount you’re willing to pay for the underlying and the minimum amount you’re willing to sell it for.
There are two types of limit orders: entry orders, which open a trade, and closing orders, which terminate an open position.
Market order vs limit order
There are times when you might want to place a market order instead of a limit order, and vice versa. Let’s take a look at some of the advantages and disadvantages of each type.
A market order is good for traders who want to take a position immediately, regardless of the current market value. But, as with any trade, the market needs a certain degree of liquidity, otherwise there’s a chance the trade won’t be fully executed, or that it’ll be executed at an average price far from the current market.
While a broker will try to place it at the best possible price, there’s a chance the market could gap between then and when the trade is opened.
That’s only true for traditional market orders, though; when you place a market order with us, we try to limit the amount of gapping or slippage your order experiences.
With our out-of-hours1 offering, you can trade on selected markets when the underlying is closed. Extended trading hours serves to reduce the risk of market gapping.
Limit orders are best used in highly volatile markets and those with a high bid-ask spread, as there’s a greater chance your order will be filled – and at the price that you want.
Because you determine the value at which you’ll buy or sell the underlying, you have control over what price you want to pay. However, there’s a chance the market may never reach the level you’re after, and so your trade won’t be executed.
You might place your order and the market takes a long time to reach your desired level – you could forget about your trade in that time, and when it finally does execute, it may interfere with your present trading strategy.
The market may perform even better in your favour than you expected, in which case, you’re subject to opportunity cost, as you’re missing out on even more potential profit.
In these scenarios, a risk management plan is essential to ensuring you keep track of your orders.
Market order: advantages and disadvantages
|Used if you want to place a trade immediately||Traditionally, your trade can be subject to gap risk|
|While not guaranteed, market orders are more likely to be filled||Needs market liquidity|
|The order is filled at the best possible price||Might lead to an unfavourable outcome if you place a large trade|
|With us, you avoid gap risk when you place your trade out of hours1|
Limit order: advantages and disadvantages
|Used for highly volatile markets and those with a high bid-ask spread||Might never be filled if the value doesn’t reach your specified price|
|The potential for big profits is there if selling a large number of shares||You might forget about your limit order if it’s been a while since you placed it|
|Can be used to open or close a trade||You could miss out on better earnings if you don’t closely watch the market|
|Provides control over the price of your trade|
When to place a market order and limit order
You may want to use a market order to hedge your risk in the underlying market. Let’s say you own Apple shares and the market’s value’s decreasing. You could enter the market as soon as possible in an attempt to mitigate the drop in share price to hedge the loss on your stock holding.
On the other hand, you could open a limit order if the market is volatile, and you want to avoid the slippage you’d likely experience with a market order. You decide on the limit to what you’ll buy or sell for depending on if you’re going long or short, respectively.
You might use a limit order when you believe the market will reach a specific value. If you think the market will increase, you may want to take a chance that the price will first decrease before going up – and therefore shave a little off the purchase price to make a profit. Likewise, if you think the market will decrease, you’ll open a limit order to sell at a price higher than the current value.
As an example, let’s say you want to trade forex and think the value of EUR/GBP will rise. . The current buy price is 0.8828 and the sell price is 0.8826. You might set a limit order to buy at 0.8823, thinking the price will decrease before it shoots up. If you’re right, you’ll have bought for 0.0003 lower than if you’d used a market order. If you’re wrong, the trade will simply never be executed if the market doesn’t reach 0.8823 within three months.
You might want to consider this strategy if you’re fairly confident of the direction a market will take, or if your fundamental analysis and technical analysis are telling you what the market’s likely to do.
How to place a market order and limit order
You can only open a trade with a market order, not close one. Because the order is an instruction to place the trade immediately, the way to do this is to place a deal on our platform.
- Open a CFD account or practise with a demo account
- Choose your market
- Use the deal ticket to select whether you want to go long or short
- Set your position size and manage your risk
- Place your trade and monitor your position
You can place a limit order on your CFD trading account.
There are two types of limit order – open and close. You can place a limit order to open a trade if you haven’t already taken a position, and a close order to terminate an open position.
You’ll also need to determine if you want the order to stay open until it reaches its expiry, or if it should fall away on a certain date that you specify.
How to place a limit entry order on a CFD trading account
Market order vs limit order summed up
- A market order is a request to a broker to open a trade immediately at the best possible price
- A limit order is an instruction to a broker to place a trade at a specific level or one that’s better than the current market value
- Market orders are a good strategy for highly liquid markets – and when you’d like an immediate fill on a trade
- Limit orders work when you believe the market will reach a specific value and are willing to wait for that point before trading
1 24/7 excludes the hours from 6am to 4pm on Saturdays (UTC +8), and 20 minutes just before the weekday market opens on Monday morning. For more details refer to the section on when can you trade out-of-hours.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.