Limit Order vs Market Order: A Guide

Understanding different order types in the context of buying or selling assets is key to developing good trading strategies. Two basic order types every trader should know are limit orders and market orders. Let’s get into what they are, how they work and when to use them.

What are Market Orders?

A market order vs limit order is the simplest type of trade order. When you place a market order you’re saying, “I want to buy or sell this now at the best price” which is the current market price. Market orders execute at the current price, they’re fast but not precise.

Market orders prioritize speed over price, so your trade gets executed immediately. They execute at the market price which can change rapidly especially in volatile markets.

Market Price Orders:

• Immediate execution
• Guaranteed to be filled (as long as there’s enough market liquidity)
• Easy to use and understand
• Good for urgent trades
• Advantage of getting the order filled quickly at the prevailing market price

Disadvantages of Market Price Orders:

• No price control
• Slippage (executing at a different price than expected)
• Can be costly in volatile markets
• May incur unexpected transaction costs

What are Limit Orders?

A limit order is more advanced, you can specify the exact price you want to buy or sell an asset at, known as the limit order price. A sell limit order is an order to sell a security at or above a specified limit price.

A limit order can only be filled at the specified limit price or better. Think of it as saying, “I want to buy this but only if I can get it at $X price or better”. An order is only executed when the market reaches the specified price.

Limit Price Orders:

• Full price control
• Protection from market volatility
• Better for cost management
• Less market impact especially for large orders
• Good for strategic trading
• Ability to buy or sell only at a specific price or better

Disadvantages of Limit Price Orders:

• No guarantee of execution
• May miss the trade if the market moves away from your limit price
• Can take longer to fill
• Requires more management

Real World Example

Let’s say Bitcoin is at $100,000 and you want to trade. The stock's price can be protected by using different order types. Stock prices can move rapidly in moments especially for illiquid or highly active stocks.

Here’s how each order type would work: Various trading orders can be affected by sudden stock price changes like earnings announcements or news that can cause price gaps.

Market Order

If you place a market order to buy at this point your order will execute immediately at or near the current market price of $100,000 depending on market liquidity and order book depth.

Limit Order

If you think the price will drop you could place a limit buy order at $98,000. Your order will only execute if the price reaches $98,000 or lower. If you want to sell you could place a limit sell order at $105,000 so you only sell if the price reaches your target. If the limit order is not executed by the end of the trading day, it will expire.

CoinAPI’s EMS Trading API

CoinAPI’s EMS Trading API is a powerful solution for managing both limit and market orders in cryptocurrency trading. The API supports limit orders with advanced features and ways to simulate market order behavior:

Features:

• Limit Order Support: Native support for price specific trading with full control over execution prices
• Market Order Simulation: Uses Fill or Kill (FOK) with limit orders to execute immediately like market orders
• Multi-Exchange Integration: Manages orders across multiple cryptocurrency exchanges through one interface
• Low Latency Infrastructure: Fast order processing and execution for time sensitive trading strategies
• Risk Management Tools: Real time exposure and position management

The API is useful for:

• Traders: Automate trading strategies and manage multiple exchange accounts
• Financial Institutions: Scalable infrastructure and compliance friendly unified interface
• Market Makers: Low latency support for market making

When to use each order type

Use Market Orders When:

• You need to execute immediately
• You’re trading liquid assets
• Execution price is less important than the trade
• You’re trading during low volatility

Use Limit Orders When:

• Price is more important than execution
• You’re trading in volatile markets
• You have a target price in mind
• You’re trading a strategy
• You want to minimize costs

Professional Use Cases

Different market participants use these order types in different ways: a stop limit order combines a stop order and a limit order and allows you to specify both a trigger price and an execution price. The stop price is important as it’s the trigger point for the order to execute which can lead to market orders and affect execution prices especially during price gaps and market movements.

Traders:

• Automate trading strategies
• Use both order types for different market conditions
• Manage multiple positions across multiple exchanges

Financial Analysts:

• Study order flow
• Analyze market impact
• Measure execution quality

Financial Institutions:

• Implement complex trading algorithms
• Manage large order flows
• Comply and risk manage

Tips

1. Always consider market conditions when choosing order type
2. Use limit orders for illiquid markets to avoid big slippage
3. Use market orders in stable markets
4. Monitor your orders when using limit orders
5. Have a plan for when to use each order type

Summary

Market orders and limit orders have their place in every trader’s arsenal. The key is to know when to use each based on your goals, market conditions and risk. Market orders give you speed and certainty of execution, limit orders give you price control and protection from volatility. Successful traders use both strategically to achieve their trading goals.

Remember there is no one size fits all – the best order type depends on your situation, strategy and market conditions. Knowing and using both order types will make you a better trader in any market.