Investment 101: Introduction to Limit Order and Market Order

Beginner
March 29, 2023
Read time:
6m

Limit and market orders are two terms that every investor should be familiar with. They represent vastly different ways of trading and determine the end price of your investments.

A limit order is an order to buy or sell at a precisely set price. This guarantees your desired price, but increases the risk of transactions not being executed.

For example, if you wish to purchase crypto “A” but for a maximum of $99 per unit – you can set a limit order to execute a transaction when crypto A’s price is equal or lower than $99.

If crypto A’s price never reaches your desired level - trade will never be executed.

Market order is an order to execute a transaction as soon as possible. It guarantees that an order will be conducted at a current trading price, which may be subject to rapid changes.

For example, if you buy crypto “A” immediately, you can set a market order.

Your transaction will be executed, but the price might change to your disadvantage before you seal the deal.

How to use Limit Order and Market Order in your trading practices?

Both types of orders are helpful for traders as they may be utilized interchangeably for different kinds of investments.

A limit order offers control over the order and its price, allowing for flexibility in trading (conditional orders). However, if the set prices are not met, transactions are not executed, or only partially, which may result in failed trades and higher fees.

Limit orders generally benefit those who trade highly volatile assets like cryptocurrencies, as rapid price fluctuations will not work to an investor’s disadvantage. Most limit orders expire in three months, meaning they close if transactions are not executed by then. Since the limit order gives complete control over the price, many choose it when they trade several assets to optimize costs.

On the other hand, a market order is executed immediately, usually at the most recent price, and does not trigger any excess fees. But, possible changes in trading prices might be problematic. In case of a deficiency of liquidity on a particular asset, placing a market order may result in a massive sale or a purchase at a price that was outside the trader's expectations.

Market orders are easier and cheaper to execute and, thus, have gained popularity among long-term investors. If chosen assets are highly liquid, and price fluctuations are insignificant, the market order might be the best option since it guarantees the execution of transactions.

How to optimize profits with Limit Order and Market Order?

The best way to optimize limit and market orders in your trading practice is to determine the volatility of your desired investments, maximum price, and a detailed investment plan.

You can set up a limit order for volatile assets and wait for an excellent price or use a market order for highly liquid assets that you wish to add to your portfolio immediately. Careful analysis of your investment plan will help you determine the best financial path.

Summary

Limit orders and market orders are two different methods of trading that you can combine for optimal profit. With a limit order, you control the price but risk not completing your transactions.


In contrast, a market order ensures the execution of transactions at a current market price, which may change before the transaction process is completed.

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Investment 101: Introduction to Limit Order and Market Order
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