TL;DR
A market order lets you purchase or sell a financial asset instantly at the best price currently available. Market orders take prices from limit orders on the order book. This means you can’t be 100% sure of the price you will get. Slippage can occur when you get a price different from what you expected.
Limit orders differ from market orders in that you can place them in advance with a set price. The exchange will only fill your order at the set price or better.
The main advantages of market orders are their simplicity, immediacy, efficiency, and ability to, in most cases, completely fill. However, marker orders are at a disadvantage due to the risk of slippage and the fact you need to be present when executing the order.
Introduction
There's more complexity to trading than just deciding to buy or sell. When you're buying or selling any financial asset like cryptocurrencies, stocks, or forex, you'll come across various types of orders. From Fill or Kill orders to stop-limits, market orders are one of the simplest and are often used by beginners. Let’s see what market orders are and how they work.
Market Order Definition
A market order is an order to immediately buy or sell at the best available price. It needs liquidity to be filled, meaning that it is executed based on the limit orders already placed on the order book. If you want to buy or sell instantly at the current market price, setting a market order is your best option. For example, the price of BNB might be rising rapidly, and you want to buy it ASAP. You're willing to take the market's price so long as you can purchase BNB instantly. In this case, you'd make a market order on your chosen exchange.
How Does a Market Order work?
Unlike limit orders which are placed on the order book, market orders are executed instantly at the current market price. There are always two sides in a trade; the maker and the taker. When you place a market order, you are taking the price set by someone else. For example, an exchange will match a purchase market order to the lowest ask price on the order book. In contrast, a sell market order will be matched with the highest bid price on the order book.
As mentioned, market orders require an exchange to have liquidity on the order book to meet the instant demand. As a market order removes liquidity from the exchange, you'll pay higher fees as a market taker when you place one.
Market Order vs. Limit Order
To briefly recap, limit orders are orders to buy or sell a quantity of a financial asset at a set price or better. You can also choose whether the exchange can partially fill your limit order or if it must be totally filled. In the latter case, if the exchange can't completely fill your order, it won't execute it at all.
Market orders can only be filled with existing limit orders. Not everyone wants to take the price available on the market when trading or investing, so a limit order is a good alternative. You can use limit orders to plan out your trades in advance without needing to be at your desk trading.
Apart from these basic differences, market orders and limit orders are suitable for different trading activities and goals. Limit orders are typically better used:
1. When an asset's price has high volatility. Placing a market order in a highly volatile market can bring unexpected results. The price might change between the moment you create the order and when it executes. These slight differences can be the difference between profit and loss for arbitragers. A limit order will ensure that you get the price you want, or better.
2. When an asset has low liquidity. In this case, using a market order may cause slippage. This occurs when there is a low volume of market makers on the order book, and your order cannot be filled easily around the current market price. You'll then end up with a lower average sell price or higher average purchase price than you imagined. A limit order, on the other hand, will not completely fill if slippage takes the price outside of your limit.
3. If you already have a strategy. Limit orders require no interaction from you to begin filling and can be placed ahead of time. This means your strategies can still execute even when you’re not actively trading. You can’t do the same with market orders.
When to Use a Market Order?
Market orders are handy when getting your order filled is more important than getting a specific price. This means you should only use market orders if you are willing to pay a higher cost caused by the slippage. In other words, market orders are helpful if you're in a rush.
Sometimes you might be in a situation where you had a stop-limit order that was passed over, and you need to buy/sell as soon as possible. So if you need to get into a trade right away or get yourself out of trouble, that's when market orders come in handy.
However, if you're not a complete beginner to crypto and want to purchase some altcoins with your Bitcoin, avoid using a market order because you might pay more than necessary. In this case, a limit order is probably better.
When you're trading highly liquid assets with a narrow bid-ask spread, a market order will get you a price close to or at the expected spot price. Assets with a larger spread have a much higher chance of causing slippage.
Advantages of Using a Market Order
Depending on the situation, there are three main advantages to using a market order:
1. Market orders are easy to use. If you're looking to trade a highly liquid coin like Bitcoin or ETH with a large market cap, a market order is a fairly safe option to use.
2. You can purchase or sell the full quantity you want of an asset. If you need to close all your positions or open one as soon as possible, a market order can almost always guarantee you'll be able to.
3. You can trade immediately. You might have time pressure to execute a trade, such as just before closing hours. You can be sure your market order will almost always be the quickest way to do this.
Disadvantages of Using a Market Order
Although a market order has strength mainly in its speed, it does suffer a lot in the control you have. Its main disadvantages come from the fact that:
1. You can experience high slippage with low-volume assets. You may find yourself paying more than you planned or receiving much less. Without enough volume on the order book, you will climb up or down through the orders placed.
2. You can't plan out your trades in advance. You can’t always be at your screen ready to trade. If the market moves against your trading strategy while you’re asleep or not available, you won’t be able to place a market order. Otherwise, you can use limit order or stop-limit order to plan in advance.
Closing Thoughts
A market order provides the most basic method for purchasing and selling financial assets. They're the best option for entering or exiting a market immediately. However, this all comes at the cost of losing the level of control you'll find with other types of orders. Your best bet is to consider the specific situation you're in and understand when it's best to use a market order or something else.
Further Reading
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