What is a Market Order
There's more complexity to trading than just deciding to buy or sell. When you're buying or selling any financial asset like cryptocurrencies, stocks, or forex, you'll come across various types of orders. From Fill or Kill orders to stop-limits, market orders are one of the simplest and are often used by beginners. Let’s see what market orders are and how they work.
Market order definition
A market order is an order to immediately buy or sell at the best available price. It needs liquidity to be filled, meaning that it is executed based on the limit orders already placed on the order book. If you want to buy or sell instantly at the current market price, setting a market order is your best option. For example, the price of BTC might be rising rapidly, and you want to buy it ASAP. You're willing to take the market's price. In this case, you'd make a market order on your chosen exchange.
Note: The value of single market price order cannot exceed 100,000 USDT.
How a market order works
Unlike limit orders which are placed on the order book, market orders are executed instantly at the current market price. There are always two sides to trade; the maker and the taker. When you place a market order, you are taking the price set by someone else. For example, an exchange will match a purchase market order to the lowest ask price on the order book. In contrast, a sell market order will be matched with the highest bid price on the order book.
As mentioned, market orders require an exchange to have liquidity on the order book to meet the instant demand. As a market order removes liquidity from the exchange, you'll pay higher fees as a market taker when you place one.
Case 1: Assuming that the current BTC market price is 50,000 USDT if a user wants to buy BTC immediately at the market price, he can select order type “Market” and set the buying amount as, for example, 50,000 USDT. After the order is placed, the order will be filled immediately, and the unfilled part of the order will be canceled. In a fast-moving market, the final buy price of this order may not be 50,000 USDT, but the real-time market price, which may be higher than 50,000 USDT or lower than 50,000 USDT.
Case 2: Assuming that the current BTC market price is 50,000 USDT if a user wants to sell BTC immediately at market price, he can select order type “Market” and set the selling amount as, for example, 1 BTC. After the order is placed, the order will be filled immediately, and the unfilled part of the order will be canceled.
When to use a market order?
As we’ve seen, market orders are handy when getting your order filled is more important than getting a specific price. This means you should only use market orders if you are willing to pay a higher cost caused by the slippage. In other words, market orders are helpful if you're in a rush.
Sometimes you might be in a situation where you had a stop-limit order that was passed over, and you need to buy/sell as soon as possible. So if you need to get into a trade right away or get yourself out of trouble, that's when market orders come in handy.
However, if you're not a complete beginner to crypto and want to purchase some altcoins with your Bitcoin, avoid using a market order because you might pay more than necessary. In this case, a limit order is probably better.
When you're trading highly liquid assets with a narrow bid-ask spread, a market order will get you a price close to or at the expected spot price. Assets with a larger spread have a much higher chance of causing slippage.
Advantages of using a market order
Depending on the situation, there are three main advantages to using a market order:
1. Market orders are easy to use. If you're looking to trade a highly liquid coin like Bitcoin or ETH with a large market cap, a market order is a fairly safe option to use.
2. You can purchase or sell the full quantity you want of an asset. If you need to close all your positions or open one as soon as possible, a market order can almost always guarantee you'll be able to.
3. You can trade immediately. You might have time pressure to execute a trade, such as just before closing hours. You can be sure your market order will almost always be the quickest way to do this.
Disadvantages of using a market order
Although a market order has strength mainly in its speed, it does suffer a lot in the control you have. Its main disadvantages come from the fact that:
1. You can experience high slippage with low-volume assets. You may find yourself paying more than you planned or receiving much less. Without enough volume on the order book, you will climb up or down through the orders placed.
2. You can't plan out your trades in advance. You can’t always be at your screen ready to trade. If the market moves against your trading strategy while you’re asleep or not available, you won’t be able to place a market order. Otherwise, you can use limit order or stop-limit order to plan in advance.