This article on Market Orders vs. Limit Orders is the opinion of Optimus Futures
Key Points:
- Under certain market conditions, traders should consider the use of limit orders, and in other conditions, traders should consider the use of market orders.
- Market orders and limit orders can be a part of a trading strategy that can be utilized by both beginner and experienced traders.
- Knowing how to place orders properly and understanding how they work is a must for developing a futures trading strategy.
Market Orders vs. Limit Orders
It’s crucial to know the difference between market orders and limit orders when trading futures. Both orders have benefits and drawbacks, and a trader’s decision will depend on their trading strategy and level of risk tolerance.
We’ll examine the critical distinctions between a market order vs. limit order, along with the circumstances under which futures traders should consider using each.
Explanation of Orders
There are many orders experienced futures traders can use when they analyze the current market pricing. Understanding the best scenarios to utilize the various order types available can provide a foundation for the following:
- How to behave when you have a predetermined price in mind for entry and exit
- A determining factor for how to place orders during certain market conditions
- Applying orders when the bid-ask spread widens
- Understanding risk management and how to act fast during adverse market conditions
What is Market Price
A market price of a commodity or financial instrument, sometimes known as the “spot price,” is the current price at which that commodity or instrument can be bought or sold.
It is constantly changing due to supply and demand. Futures traders must understand the market price to enter and exit contracts and control their risk exposure.
Buy Limit orders
When you look at the current market price, intend to buy it, and think you can do better than the current market price or enter at a specified price, you will enter a Buy Limit Order.
A buy-limit order will look like this:
Buy 1 ES December 2023 at a limit of 4,000 (This is a hypothetical example)
This means you will not accept any price that is worse than 4,000. However, this order will work until the end of the session unless you specify a GTC (Good Til Canceled, explained below)
Sell Limit Orders
When you look at the current market price, intend to sell it (short), and think you can do better than the current market price or enter at a specified price, you will enter a Sell Limit Order.
A sell-limit order will look like this:
Sell 1 ES December 2023 at a limit of 4,000. (This is a hypothetical example)
This means you will not accept any price that is worse than 4,000. However, this order will work until the end of the session unless you specify a GTC (Good Til Canceled, explained below)
Both sell and buy limit prices could be entry and exit prices.
Major exchanges, such as the CME, Eurex, ICE, etc., accept market and limit orders.
When to Use Limit Orders
- When you want to buy at a maximum price (buy limit)
- When you want to sell at a minimum price (sell limit)
- When liquidity is poor during the trading day (thinly traded)
- When you pay higher fees for execution and need to max out your potential profit
- When the trading price is far away from the market
- When you trade outside of regular market hours
Although limit orders can save you money because of limited execution slippage, the other side of the coin is missed opportunities if the market does not accept your order and grant you a fill.
When to Use Market Orders
Market orders should be used within a liquid market. This will help to ensure the fill price is not far from the prevailing market price.
Markets such as Emini S&P, crude oil, gold, etc. typically are liquid enough to not experience too much slippage on a market order.
Thinner markets with less liquidity may experience higher slippage than the visible current bid or ask.
Market orders should be considered:
- When you want to be executed immediately at a market order
- when a higher purchase price or a specified lower price is not significant
- When you trade long-term investors strategies
- When execution price is an exit at all costs (these are specific circumstances related to your financial situation or sudden market change).
Risks of Market orders: You are filled at the current market value while the market is running away from you. A market order could be filled with considerable slippage. A market order is also synonymous with “at the market.”
As a trader, you should review the key differences between market orders and limit orders, as you may encounter different market circumstances during trading hours.
Let’s go through real-life examples of where you would want to use market orders:
- You trade the day trading session and leave a trade open accidentally. You want to exit ASAP when trading resumes on the next futures session.
- When a contract expiration date is missed, you need to exit to avoid delivery. (this is related to physical commodities.
- Your trade executes the wrong futures contract, and you need to exit this trade ASAP.
- You bought the wrong number of futures contracts by error and wish to sell to the futures contract.
Let’s go through some examples of limit orders.
- A higher price on a futures contract has been reached, and you wish to buy at a lower price, thinking this high will be touched again upon your entry.
- A market order will result in an unfavorable price
- You are a scalper and wish to buy or sell for small tick increments.
- You are trying different price strategies and wish to save on commissions and slippage.
- When the bid and ask are far apart
- Your futures contract is thinly traded.
Practicing Market Orders vs. Limit Orders Now
If you wish to know the impact of market orders and limit orders, you should practice with Optimus Flow, a technologically advanced futures trading platform for short-term day traders of futures contracts.
- Live and streaming prices.
- Place limit and market orders straight from the chart.
- Depth of Market order execution.
Good Until Canceled
A good until canceled order could apply to both a limit price and a market price. Good “til” cancel order, also known as GTC, could apply to an exact price for a futures contract until the contract expires.
For example, if you want to buy the Futures contract on the ES E-Mini S&P at a lower price and not at the prevailing price, you could add a GTC to your order, and it will work to fill you at your target price until the contract expires.
A GTC order may be a bit counterintuitive when you attach it to a market order, but it would apply to a situation when the market is at a lock limit, so your GTC puts you in a queue for liquidation at a market price.
Remember, in the futures markets, you are not guaranteed a fill if the markets are locked or experiencing large price gaps where no bids and offers are available.
Stop Orders
Stop orders are market orders. Stop orders could be applied to sell and buy orders, depending on whether you are short or long. So once the futures contract has traded through a specified price, the order (the stop price) becomes a market order.
FAQ: Rules for Limit Order Price Execution
Can I buy a limit Order Above Market?
No, you can not; a buy limit order above the market may get executed at the market or rejected depending on the trading software.
Can I sell a Limit below the market?
No, you can not; a sell limit order below the market may get executed at the market or rejected depending on the trading software.
Can I place a limit order when the market is closed?
Yes, you can. However, ask your futures broker if that order will carry to the next session.
Can I place a market order when the market is closed?
Yes, you can. However, ask your futures broker if that order will carry to the next session. Some platforms do not take orders if no going price is detected.
Do I have to specify a specific order for a limit order?
Yes, you do. On the other hand, market orders do not need a specific price.
If my limit price gets touched, does it guarantee a fill?
No. Your price has to go below the market order for the buy limit order to fill. And go above the selling price for a sell limit order to have a fill. Orders that only get touched are filled on a queue, as explained above.
Since a stop order is a market order, can I attach a limit order to a stop?
Yes, you can. So you can specify a limit order along with a stop order. They could be the same, or you could leave a “breathing room” of a few ticks or points to allow yourself reasonable slippage.
Conclusion
Futures contracts can be executed using market and limit orders. Execution of limit orders occurs at a specified price or better, while execution of market orders occurs at the current market price.
Market orders are suitable for quickly purchasing or selling futures contracts in a liquid contract like the Micro Emini S&P. When you want to wait for the market to reach a certain price, a limit order is what you’ll need.
Before deciding between a market orders vs. limit orders, you should consider your trading objective and risk tolerance.
Unlike limit orders, which give you more control over the price of futures contracts, market orders carry more uncertainty because they do not necessarily guarantee an ideal price. This applies to a stocks price, a futures price, or even spot FX prices.
By placing a limit order lower than the current market price when buying or higher when selling, limit orders can potentially save you money.
Think about how active the futures contract is. Market orders are almost always filled at a price requested in a liquid market; limit orders may not be if the trading volume is low for the underlying contract.
ALSO READ | How to Start Trading Futures | A Beginners Guide
There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.
