Market and Limit orders are two critical trading terms to be aware of before you begin trading. But how do you decide whether or not to use a limit order versus a market order? That depends entirely on what you are trying to achieve.
What is a Market Order?
A Market order is designed to be executed quickly. It is meant to buy or sell at the best average market price. The drawback of a market order is that you’re not guaranteed the exact price you’re trying to buy or sell at - you’ll have to pay the difference between the buyers’ bid price and sellers’ ask price in order to execute the trade. This is referred to as the bid/ask spread, and it’s usually relatively small unless the price moves very quickly.
In short, using a Market order you can buy or sell at the best average market price. Market orders are designed for immediate execution.
What is a Limit Order?
A limit order lets you buy or sell at a fixed price that you determine, and oftentimes you’ll get a better price depending on how the market moves. The advantage of limit orders over market orders is that they can ensure a better average fill price, since the bids or asks used to fill the order will be at the limit price. Additionally, if the market moves in your favour your limit order can fill at a price better than your limit price (i.e., your limit buy order fills at an average price lower than your limit price or your limit sell order fills at an average price higher than your limit price).
The disadvantage of limit orders is that there's no guarantee the order will completely fill (or fill at all) - it may not be the case that adequate bids or asks to fill the order will appear on the market.
In short, using a Limit order you can buy or sell at a fixed price (or better). Limit prices are designed to let you buy or sell exactly at the price you set.
Image: Simple order form showing the Market/Limit toggle button
Examples: If the lowest current ask for XBT/USD is $96, but you think you can get your buy order filled a bit lower, you might put in a limit buy order at $94. You can also use market and limit orders to create short positions. For example, if the highest current bid for XBT/USD is $95, and you want to open a short position at $110, this can be done by placing a limit sell order at $110. This order will start to fill at $110 (or better) once bids at $110 (or higher) appear in the order book. For any short position, you are borrowing in order to open the position, so leverage must be used.
Image: creating a limit buy order with a price of 94.00 USD on the XBT/USD market
Want to know what price to set your limit orders at? Click here for some recommendations.