From Market Orders to Limit Orders: Key Order Types Every Trader Should Know
Market Orders
Orders can be divided into two categories: market orders and limit (pending) orders.
A market order is executed instantly at the best available price. When a trader buys, the order is executed at the offer price; when he sells, it is executed at the bid price.
However, the actual position opening will only sometimes occur at the expected price. Exchange rates are constantly changing. It takes some time from pressing the mouse button to transaction conclusion. During this interval, rates may change again. In periods of high volatility, prices change at large intervals (slippage), and order execution may occur at unfavorable levels.
Limit Orders (Pending Orders)
Limit orders are placed away from the current price. They will only be executed at the limit price or better. Thus, unlike market orders, limit orders offer certainty about the execution price but leave uncertainty about whether the price will be reached and the position opened.
One of the most popular trading platforms, MetaTrader4, offers the following types of orders:
For Instant Execution (Market Orders)
- Buy (executed at ask price)
- Sell (executed at bid price)
For Deferred Execution (Pending Orders)
- Buy-stop (a buy is executed at a price above the current one)
- Buy-limit (a buy is executed at a price below the current one)
- Sell-stop (a sell is executed at a price below the current one)
- Sell-limit (a sell is executed at a price above the current one)
Picture 1: Limit Orders. Source: MetaTrader4
Orders may have take-profit or stop-loss orders attached to them. Apart from their purpose (buy/sell), orders may satisfy other criteria, such as validity instructions (valid until the end of the day).
Example:
Scenario 1
EUR/USD trades at 1.1500 (1 euro is exchanged for 1.15 dollars). Our analysis concludes that if the price drops to 1.1400, the downtrend will continue to 1.1200. In this scenario, a sell-stop order at 1.1400 with an attached take-profit order at 1.1200 will be placed for a profit of 200 pips (1.1400 – 1.1200). Limiting potential losses with an attached stop-loss order (for example, at 1.1500) is recommended.
Scenario 2
EUR/USD trades at 1.1500. A price of 1.1400 is considered a turning point, from which pair will rise to 1.1700. In this case, a buy-limit order at 1.1400, with an attached take-profit order at 1.1700, will be placed for a profit of 300 pips (1.1700 – 1.1400). A stop-loss order (for example, at 1.1200) should limit the maximum position loss.
Conclusion
There are two primary types of trading orders: market orders and limit orders. A market order executes immediately at the current market price, while a limit order sets a specific price at which the trade will be executed, only if the market reaches that price.
Using a demo account can help traders gain experience with order management.
