Types of market orders and when to use them

The most common types of market orders are market order and limit order.
Market orders are instructions to buy or sell a security at a current market price.
Using market orders guarantees instant transactions as long as there are buyers and sellers.
Limit orders are instructions to trade a security at a pre-determined price sometimes in the future, when or if the asset reaches the set price.
Using limit orders can help traders avoid having their trades executed at unfavourable prices due to market volatility and slippage, as well as getting more favourable prices for selling securities that have changed in value over time.
Stop orders can be attached to open positions in MetaTrader 4 Platform.

If you are just starting out as a trader, you may find yourself tangled in financial jargon regarding different market orders. Even sessional professionals have to refresh their memory when it comes to all the available market orders. Understanding different kinds of trading tools can be difficult at first, but it all makes intuitive sense. So, let us help you quickly grasp how all of this works. You will be up to speed in no time. Traders have several order types at their disposal. Each one helps them navigate markets in different ways. If you know when to use each order, you can control your positions, trade effectively, and find the right strategy. Trading excellence starts with understanding the basics.

What is a market order exactly, and why should you know about it?

Market orders are essential tools of trading. When traders instruct brokers to buy or sell a security at a current market price, they use specific types of market orders. Brokers offer their clients two sets of prices, Bid and Ask. Traders buy the ‘Bid’ and sell the ‘Ask’ price. Popular investment securities frequently exchange hands. International sellers and buyers are trading big-cap companies, index funds, and precious metals almost every millisecond, creating a perfect environment for market orders. Because the market moves fast, traders can complete sell or buy assets almost instantly.

There are two types of orders: market and limit

When trading on the MetaTrader 4 platform (MT4), market orders allow traders to buy or sell at the current market price. For example, if you want to purchase CFDs of Australia 200 at the current market price, then you execute a market order and instantly receive these indices in your account. On the other hand, limit orders help traders control their investment decisions by allowing them to pre-define prices at which they are willing to buy or sell. For example, if you want to purchase CFDs of Australia 200 but do not want to pay more than $6,800 per security, then you can place a limit order that will only execute once the market price has dropped below that point. Let’s take a closer look at each set of orders.

Market order

A market order is the most common type of order placed with a broker. When buyers set a market order, they agree to acquire security at an offered price. Sellers can also sell with a market order following the same principle. You can usually sell at the latest Bid price because someone on the other end is looking to buy your security at the Ask price.

Example

Imagine that we have Trader 1 and Trader 2, both trading on the MetaTrader 4 platform. Trader 1 is selling ASX 200 CFDs at a price of $7,100. Trader 2 is looking to buy at any given price using the market order. He wants 10 CFDs of ASX 200, and he wants them now. Trader 1 can instantly sell these CFDs to Trader 2, and the transaction will go through as a market order.

Traders who are satisfied with the available price use market orders. These orders are great for executing instant transactions.

Limit order

Limit orders are the main alternative to market orders. Unlike market orders that tell brokers to sell or buy immediately, limit orders let traders define the buy and sell prices in advance. As a result, limit orders become useful when trading volatile economic news, chasing multi-day price goals, and trading securities with thin liquidity. When the security reaches the pre-defined price, the Limit order automatically kicks in and acquires the asset. Next time you check your MT4 dashboard, you will find that you now own the wanted security. To execute a limit order, the MT4 platform offers four options:

Buy Limit: Brokers execute buy limit orders when the Ask price falls to a pre-defined value. Traders order buy limit for security they believe will change the trend after dropping to a specific price, usually around support levels.
Buy Stop: Traders execute buy stop orders to buy an asset at a higher price in the hope of the asset continuing the uptrend.
Sell Limit: Brokers execute sell limit when the Bid price rises to pre-defined levels. Traders use sell limit when they believe the tide will turn and the price will fall after climbing to a certain point, usually around resistance levels.
Sell Stop: Traders use sell stop when they believe a security will continue the downtrend if the price drops to a certain level.

Example

Our proverbial Trader 1 owns 10 CFDs of ASX 200 at the market price of $7,100 per contract. After carefully conducting fundamental and technical analysis, Trader 1 concludes the price may rise to $7,200, but he is unsure when this may happen exactly. He decides to set up limit order for 10 Australia 200 CFDs at a target price of $7,200. He now needs to wait for the market to reach his target price. In the meantime, Trader 2, anticipating the same spike in the Australian index fund and decides to request ten buy stop orders for Australia 200. Luckily for both traders, the market does not take long. ASX 200 reaches $7,200 per share the following day. Trader 1’s limit order kicks in and sells ten shares to Trader 2. By the time these two traders return to their dashboards, they have realised their investment goals.

Limit orders help traders stay closer to their trading goals. It is also practical, as traders do not have to patrol the market around the clock. Once the Limit order is set, you can focus on something else and let your broker buy the asset if or when it reaches the wanted price.

Diving deeper into order types

Now that you have a general idea of market orders, let’s explore what you can precisely do with each one. Rakuten Securities Australia has partnered with the MT4 platform to bring the best trading experience to our traders. On MT4, traders have three execution modes, two market orders, four pending orders, two stop orders, and one trailing stop order at their disposal. The above orders follow the same principles outlined in the article, but each one carries a nuanced difference that can help traders reach their investment goals. In addition to market and limit orders, you can attach stop loss and take profit orders to each investment. Professional traders frequently use take profit and stop loss when trading CFDs, Forex, Metals, and other leveraged assets. Stop loss orders ensure that you minimise your risks, while take profit helps you execute your target goals even if you’re not keeping.

Open a demo account and start trading today

If you decide to invest personal capital, please stay mindful of the fact that the value of your investments can fall and rise at any time. You may risk losing the invested amount. For that reason, try a free demo first. Join some of the largest global markets without having to invest any of your money. Start trading right away and find out how to invest with market orders. Experience the real action without any risks.