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What Is the Difference Between Market Orders and Limit Orders?

March 8, 2022 by Daniels Trading| Tips & Strategies

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.

Our blog has critical trading information perfect for new and experienced  traders, hedgers, producers, and investors.

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).

For more information on all things futures, subscribe to the Daniels Trading Futures Blog. Written by our team of experts, the blog is a valuable tool for traders, producers, and investors alike. Don’t wait—sign up here.

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Filed Under: Tips & Strategies

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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