To briefly recap, limit orders are orders to buy or sell a quantity of a financial asset at a set price or better. You can also choose whether the exchange can partially fill your limit order or if it must be totally filled. In the latter case, if the exchange can't completely fill your order, it won't execute it at all.
Market orders can only be filled with existing limit orders. Not everyone wants to take the price available on the market when trading or investing, so a limit order is a good alternative. You can use limit orders to plan out your trades in advance without needing to be at your desk trading.
Market Order | Limit Order |
Purchases an asset at the market price | Purchases an asset at a set price or better |
Fills immediately | Fills only at the limit order’s price or better |
Manual | Can be set in advance |
Apart from these basic differences, market orders and limit orders are suitable for different trading activities and goals. Limit orders are typically better used:
1. When an asset's price has high volatility. Placing a market order in a highly volatile market can bring unexpected results. The price might change between the moment you create the order and when it executes. These slight differences can be the difference between profit and loss for arbitragers. A limit order will ensure that you get the price you want, or better.
2. When an asset has low liquidity. In this case, using a market order may cause slippage. This occurs when there is a low volume of market makers on the order book, and your order cannot be filled easily around the current market price. You'll then end up with a lower average sell price or higher average purchase price than you imagined. A limit order, on the other hand, will not completely fill if slippage takes the price outside of your limit.
3. If you already have a strategy. Limit orders require no interaction from you to begin filling and can be placed ahead of time. This means your strategies can still execute even when you’re not actively trading. You can’t do the same with market orders.