New traders often have doubts about the difference between limit orders or market orders. And because of this, they often end up making mistakes that can be costly. Also, it is essential to know the difference between them to understand which one to use when configuring your STOP order.
This article aims to clarify doubts simply and directly.
Limit order buy/sell
When you send a buy or sell limit order, you are thinking about future prices. For example, Bitcoin is currently priced at $ 9150, and you want to buy when the price reaches $ 8900. In this case, you must use a limit order set at $ 8900. When the price reaches the pre-defined value, the order will be executed. Simple right? Not so much. The disadvantage of limit orders is that there is no guarantee that the order will be fully filled (or even partially filled). You will have to wait for the price action to happen and hope to reach the determined prices.
However, many times you want to buy/sell the asset as soon as possible, as you believe that the price is on the verge of a more significant movement. Placing limit orders in these cases can become very inconvenient due to the robots that dominate the market that will place an order in front of yours almost instantly. In these cases, the best solution is to use a market order.
Market order buy/sell
This type of order is intended for those who have certain urgency in executing their order without wanting to be at the mercy of the market waiting for the price action. From the moment you send an order to the market, it is executed immediately, taking the best prices from the order book. It’s the easiest way to buy and sell right away
A common mistake for beginners is to think that the last price negotiated is what you will get when placing a market order. The order book can change significantly since the previous trade price, especially in less popular trading pairs. So when you execute a market order, you have no guarantee of the exact price you are trying to buy or sell. It depends on what is available in the order book at the precise moment that your order is being executed.
A negative point of market orders is that they usually have a higher rate to be executed, especially in exchanges that have leverage, such as Binance and Bitmex.
These are the main differences between a limit order and a market order. Both have their objectives and must be applied wisely and according to your trader profile.
The big ones also make mistakes
There are cases in the market where whales (large investors) have already made the mistake of placing an order on the market by mistake, causing the price to vary widely, thus creating real damage to the asset’s order book. See the example that happened at Bitstamp in mid-May 2019.
In this case, a whale (a big investor) dumped 5000 BTC in one go, which made many suspect an ordering error. What was supposed to be a limit order ended up being a market order. The sale was immediate, forcing the price to plummet quickly. The order was immediately absorbed, yet another reason why we believe it was a human error.