Limit order vs market order and which is better? These are the two most popular order types when entering into a trade. We are advocates of using limit orders over market orders to secure entries and exits. Market orders give you an instant fill but there’s no guarantee of your fill price. Limit orders lock in your fill price but don’t guarantee you will get filled. They are safer though.
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Limit Order vs Market Order Explained
- Limit orders fill at a specific predefined limit price or better
- Traders are in control of their fill price with limit orders
- Market orders fill at the best available market price, so you aren’t control of fill pricing
- Limit orders control fill price but traders may miss their entry price
- Market orders get the quickest entry but not the best fill price
Investopedia defines a limit order as an order placed with a brokerage to execute a buy or sell transaction at a set number of shares and at a specified limit price or better.
In other words, you’re in complete control of limits from the number of shares you want to the price the order fills as. Having control of entry price means you can control getting a better position.
Remember that limits are set to fill at the price you’re looking for or better. That means you could get an even better fill than what you expected.
However, that can mean that your trade doesn’t get filled. For example, you think stock ABC is going to retest it’s support level of $2.54 so you set limits for that price.
Instead it tests at $2.60 then heads back up to resistance and breaks out. It barely missed your limit buy in and you didn’t take advantage of the move. Although that doesn’t need to be seen as a bad thing.
Yes it isn’t fun when we see a missed opportunity. However, using proper risk management is going to save you more often than not.
Sticking to your trading plan is always better than trying to have a home run trade every time. In fact, greed usually blows up accounts instead of making them bigger.
Another thing limits do is limit the time an order is open. In other words, you can set the order to cancel if your price target isn’t met within a certain amount of time.
Investopedia defines a market order as a request by an investor – usually made through a broker or brokerage service – to buy or sell a security at the best available price in the current market.
In other words, a markets fill quickly. This is the order that many traders use. They use it because it’s efficient, quick and the most basic of all orders.
You’re entering and exiting a trade as quickly as possible. That sounds great right? It can be for large cap stocks. However, markets don’t mix well with low floats.
That might sound like an oxymoron. Why wouldn’t a market order be good for a stock that’s volatile? You’re trying to get in and out as quickly as possible.
Low float stocks tend to have large bid/ask spreads. Markets don’t fill at the the best prices and you end up getting an entry or exit you didn’t want.
Many brokers will have the buy/sell buttons for you to hit so you can execute market orders as quickly as possible.
Is One Better Than the Other?
Here at the Bullish Bears we are big proponents of limit orders. Why wouldn’t we rather have a market order that fills fast? As we stated earlier, we like the control the limit order give us.
We can set the price to fill, sell and the amount of time to leave the order open. In fact, with a limit order you can add a stop loss as well.
What does that do? It takes the emotion out of trading. Trading is mostly emotion. That’s what moves markets and that’s what seasoned traders take advantage of.
Greed and fear move stocks. When you take the emotion out of trading, like with limit orders, it forces you to stick to your plan.
You’ve heard the saying “plan your trade and trade your plan”. Those are wise words. Many times when we veer off our trading plan, the trade blows up on us.
When we allow greed and fear to take over our trading, nothing good comes from that. Sure market orders get you faster fills but having control over your entry and exit points makes for better trades.
It comes down to your trading preference. We’ve seen traders who want their orders to fill as quickly as possible.
You may find you prefer speed to accuracy. It’s all a matter of your style, how you trade as well as the type of stocks you trade.
If you need more help, take our stock market basics course.
Frequently Asked Questions
- A limit order works by placing a buy or sell order for a specific price or better
- Limit orders either fill quickly or they don't
- Limits can only be filled if the stocks price reaches limit price
- Sell limits can only be implemented if price is at limit or higher
- It's possible to miss an entry or an exit
- Market orders get filled before limit orders due to immediate price execution
- Limits may take time to execute due to price needing to reach limit
- Markets are more instant order flow, while limits can be delayed