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I'm pretty new to trading, more specifically day-trading, and on my paper trading account, I am given the option to trade at the market's current value vs. putting in a limit order. I could understand using a limit order if you don't have time to constantly keep track of the market, but day-trading isn't exactly the most hands-off type of trading. I have found that it's a lot easier just to wait for a certain price that you like and put/short at market price instead of setting a limit order and hoping for the stock to hit your preferred price. Am I just being naive or are limit orders just universally less reliable than market orders?

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    In my experience people ask the point of a market order. Why would you trade anything and be completely price agnostic? No professional trader would be. I've worked on several execution systems for trading firms and we intentionally never implemented market orders because we never wanted a trader to accidentally send one. – ford prefect May 21 at 14:22
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    @fordprefect Interesting comment about technical implementation for your traders. – Grade 'Eh' Bacon May 21 at 15:40
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    @fordprefect It depends. For large investors or small cap trades with low volumes that would be the case, but for individual investors trading in small quantities of highly liquid large cap assets market orders are quick and easy and are virtually guaranteed to execute immediately very close to the ticker price. You don't put on a space suit to drive to the corner store. Doesn't mean you couldn't, and it does mitigate certain risks, but it's not really necessary. – J... May 22 at 13:31
  • Keep in mind that when you place a market order you are actually trading with people that have limit orders on the book; and conversely limit orders need to wait for market orders to fulfil the trade. The two order types perfectly intertwined. – csiz May 22 at 15:34
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A market order basically determines when the order is executed: as fast as possible but the price is unknown.
A limit order determines at what price the order is executed: at maximum your limit but the execution time is unknown.

Whether a limit order is useful depends a lot on what you are trading. If you are trading a liquid stock during market hours, there is little gain in adding limit orders. Those stocks won't be jumping in crazy patterns within the next few seconds that it takes to execute your order.
If you are trading something exotic, a limit order close to the current price can make sense. If you are placing orders while markets are closed (e.g. late in the evening for execution the next morning) a limit order is an absolute must.
A good rule of thumb can be given by looking at the bid-ask-spread. If it is small, a stock is liquid and a limit order probably unnecessary. If the spread is large, use a limit order.

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  • Is there any harm in using limit orders? If a stock seems be liquid at $10/share and one puts in a limit order at $12, I would expect the order to get filled just as a market order would unless there the supply of people willing to sell at $12 or less dries up before one's order is processed, and if that does happen I'd want to figure out what was going on before buying at a higher price. – supercat May 21 at 22:41
  • @supercat yes if you try to be too "smart" about it: bidding $9.98 for a stock that's at $10 thinking that you'd skim a couple cents apiece this way. The price might actually be going away from your limit and you'd never buy that stock. – njzk2 May 22 at 22:19
  • @njzk2: Is there any harm in placing limit orders at prices that will be filled unless something severely unexpected happens? If one is expecting to pay about $10 for a stock and puts in a limit order at $12 and the supply of sell orders below $50 dries up, not buying the stock at $12 would seem a better outcome than a purchase at $50. Sure one might luck out if one buys for $50 and is able to sell for more, but people who buy into a bubble are essentially guaranteed to, on average, lose money. – supercat May 23 at 6:18
  • No, there is no harm. Actually, this is the recommended way to trade stocks with a larger spread and/or lower liquidity. If they are trading at 10$ and you want to pay about 10$, just place a limit order for like 10.10 to avoid anything changing severely against you – Manziel May 23 at 9:08
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    @Manziel: If a stock were trading at $10/share and the supply of people willing to sell a stock were to dry up except for one person who was willing to sell a share for one million dollars, what would determine whether a market order would get left unfulfilled, or whether the person who had expected to spend about $10 would be on the hook for another $999,990? Are any sort limits applied by default to guard against such possibilities? – supercat May 23 at 20:36
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I think you might be misunderstanding what a market and limit order are.

To clarify.

A market order will be executed at whatever the current price is when the trade happens. So you can't be sure what price you will get, but you can be reasonably certain the transaction will happen.

A limit order allows you to put in an order and only exercise it at the price you specify or better (lower if buying, higher if selling).The downside is that the trade isn't guaranteed to happen if that price is not available on the market.

In most cases you should be using a limit order unless you absolutely MUST trade the stock at any price.

The usefulness of limit orders is not only for day trading

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    I think an important point this answer is missing is that orders don't execute instantly. If you submit a market order at a time the market price is $400, that doesn't mean it will be executed at $400. Market volatility may have moved it arbitrarily far, especially if many traders are trying to make similar trades at once. A limit order lets you put in a limit on how far off of the current market price you're really willing to execute. – amalloy May 21 at 4:56
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    The quoted price is also just the last price a transaction was executed at. It doesn't mean that price is still available even. – JohnFx May 21 at 13:02
  • @amalloy I'd also add that it often surprise people when they realize that a stop market order doesn't mean the market order will be executed when the stop gets hit; it can take some time in between – Thomas May 21 at 23:08
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    @Thomas: People also don't realize that prices can literally change instantly. If someone has a pending limit buy order for 100 shares at $500 but nobody else is willing to pay more than $100 when someone seeks to sell 101 shares at market price, the price will instantly jump from $500 to $100. If someone has a stop loss order at $350, without a lower price limit, all their shares would get sold for $100 or less. – supercat May 23 at 6:29
  • Depending on what you trade it can also sometimes be hard to trust the book (in cryptos where spoofing is totally ok, for example) so even with good precautions, this can happen too. – Thomas May 23 at 15:02
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Suppose we are trading a very illiquid stock of a small company. Some people are trading around a small number of shares for 10€. There are standing sell orders of a volume of maybe 2k oder 3k shares around 10€. They are selling and buying some hundreds of stock. There is another standing sell order for 10k shares at 1000€.

You place a buy order for 12k shares.

What happens?

You pay 1000€ per share for the shares exceeding the 10€ sell orders. The price you see while placing the order is 10€.

Doesn't happen? I've myself bought shares for a total of 1000€ and increased the stock price by 10% while doing so (from 7€ to over 7.8€, so no penny stocks). And in the news, other people have done a lot worse. Just recently a women placed an order for ~25k and left the deal with a loss of 360k. (Source in german: https://app.handelsblatt.com/finanzen/banken-versicherungen/banken/comdirect-kursschwankung-beschert-anlegerin-hohen-verlust-doch-wer-traegt-den-schaden/27080916.html?ticket=ST-1351009-QtmrjHAqAesgEz2OPIhd-ap2)

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    It might be good to adjust your example to have a definite number (e.g. 2k) of pending sells orders at 10€, and then indicate that an attempt to buy 12,000 shares at market price would result in the purchase of 2,000 shares at 10€ each, and 10,000 shares at 1000€ each. – supercat May 21 at 22:32
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JohnFX wrote:

A market order will be executed at whatever the current price is when the trade happens.

This is entirely accurate. But who sets "the current price"?

People entering limit orders.

When you enter a limit buy order, you announcing to the world, "I'm willing to buy at $x."

When you enter a market buy order, you are saying "whatever people are bidding, I'll pay it."

For small orders, you may not care about the difference. If you want to buy 100 shares and the security you are trading moves millions of shares per day, and your trading strategy won't be affected by a move of a few cents up or down, then it doesn't matter much.

But say you are looking to buy 1,000,000 shares. There are 400 shares with an ask of $50.00, 400 with $50.05, 400 with $50.10, ... you will have to pay increasingly higher prices as you exhaust the "order book", which is the list of people who have entered limit orders. Before your market order for 100,000 shares has finished executing you will have pushed the price up significantly, and that likely is contrary to your objectives.

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The other answers do a fine job, but maybe an example will help. The market is composed of bids and asks; the minimum selling price is the ask and the maximum offer price is the bid. When these two values overlap, your broker executes the trade.

Imagine an instance where a seller sets a ridiculously high price (think 25% higher than the last transaction) on a thinly traded security at the end of the day. If some poor fellow then enters a market order overnight, and nobody else comes along and sets a lower floor by market open, the order is filled at the high price.

This happens more often than you think, and in fact is a kind of crummy way that some attempt to periodically game the system and take advantage of inexperienced traders.

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The other answers are great but just a scenario to maybe better illustrate the point.

Let's say you're watching some penny stocks and you see one that routinely fluctuates between .01 and .03 most days. If you monitor this and the last trade was .01 and you execute a market order to buy, (it's not instant) you might get it at .01, .02 or .03. If you get it at .03 then theoretically you're screwed unless it breaks the pattern and goes higher. If you enter a limit order to buy at .01 and it executes, then you can enter a limit order to sell at .03 and triple your money if it executes.

The only time I use market orders is for mid-term to long-term investments or buying a dip or something where I want it now and I'm OK paying slightly more than the last trade price.

Especially when day trading, you should already have entry and exit prices in mind and a market order won't reliably accomplish that.

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I'm going to offer a bit of nuance to add to the other answers, because you mention you are day trading.

Trading and especially day trading is quite a bit different from investing, as you are trying to make money off what are basically random fluctuations in price (which may be caused by random news), rather than long term fundamentals. To make money trading you need some kind of system which does a decent job at giving you indicators of when might be good times to get in and out of a trade. What you want to avoid are "false positives" - as prices at small time scales move up and down seemingly at random you can't just pick the last direction the stock was moving and for instance decide to buy just because the last tick went up. In any given time frame, the market might continue moving up/down (trend), or it might reverse. When you are day trading, one simple strategy is to either assume the price is going to trend or reverse and either go with the trend or against it if the previous trend seems to be stalling out.

Now where do limit orders come into this? The bid/ask spread itself introduces random fluctuations in the price. If you buy at the ask and somebody else immediately sells at the bid, the price immediately appears to move against you. But if you place a limit order to buy, you are essentially placing yourself to buy at the bid rather than at the ask, albeit at the end of the line at that price, wherever that is. Where this is ultimately beneficial in trading is when the price is not trending. If your indicators can do a decent job at predicting these inflection points (and people try a lot of things like Fibonacci retracement points and who know what else) then placing a limit order can both serve as an automatic entry point only when the trade is calculated as having a good chance of succeeding, as well as shaving off what you would have lost to the spread.

By contrast, if the price is trending placing a limit order will likely be futile as the price will be moving away from whatever limit you set. In this situation you might place a limit if your model gives you some idea of how much you expect the price to change so that the market doesn't move so fast that by the time your trade executes (slow fingers and what not) the price move you were expecting has already occurred. Again, this is really about reaching a point where the price is no longer trending, only from the reverse side (not getting in if you miss out on the gain rather than getting in as the reversal occurs).

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Limit orders are needed to make the market work at all.

Imagine that every order placed by the buyer or seller of a commodity or equity were a market order.

That literally means "buy or sell this at any price". Well, what is that price? Nobody is specifying it: nobody is bidding and nobody is asking.

Limit orders are the bidding/asking mechanism that drives the price.

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    But why should the question author be the one to make the market work if they can just post a market order and let others do the pricing? – Philipp May 23 at 15:58
  • @Philipp That is a worthwhile point to cover. – Kaz May 23 at 17:26
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When you're day trading, you're frequently (typically?) trading rather small market fluctuations already. Individual cents matter (ideally you are multiplying these individual cents by a lot of shares to make the trade worthwhile.)

A limit order ensures that you're buying and selling on the right side of the market spread rather than on the wrong side of it as a market order often would. It also ensures that your trade simply won't happen at all if your target price is not available (e.g. if you tried to buy on a quick price dip, but the dip was already gone before you got your order in.) This is very important when day trading since you're likely already trying to trade rather small swings in the price where the market spread represents a significant portion - or even the entirety - of your potential profit. And because you don't want your buy to execute if you've already missed the window of opportunity for your trade.

Also, just as a word of advice, day trading is usually not advisable unless you're already quite familiar with the markets and really know what you're doing. It does sound like you're staying on top of it, which is good, but, even so, day trading is quite risky and is rarely a good idea for inexperienced traders, unless maybe you're just doing it in small quantities on no-commission trades as a learning exercise.

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