What is a Market Order? How and when you should use it? When you should avoid it? What are the risks with a Market Order? How to overcome some of these issues? What are the special instructions that apply to a Market Order?
You might be familiar with the Market Order. You place a buy or a sell order with your broker; you did not specify an order price. Your broker will execute the order at the current market price. Your broker will execute the order as a Market Order.
For example, you are watching EURUSD in your chart, and you saw a buy signal. The market is moving up. You want to buy 10 lots of EURUSD. You place the order without specifying an order price. This is a market order. Market Orders are the best for filling orders quickly; it doesn’t provide the price guarantee. Your buy order will most likely get filled close to your desired price; it might also get filled at a higher price.
Market Order
Buy or Sell order at the current market price. When you buy you will pay the ask price of the market and when you sell you will get the bid price of the market.
EURUSD is in an uptrend. There are more buys for EUR against the USD. The demand for EUR is up, and this has driven up the market price for EURUSD. Say, the ask-price for EURUSD when you placed the buy order was at 1.1345. The buyers have bid higher, raising the ask-price for EURUSD. When your market order for the buy was executed, the ask-price for EURUSD has gone up to 1.1350.
In an uptrend market, the buyers are in control. As the buyers bid higher, the ask-price for the currency pair will go up. When your broker executed the buy order, the market was trading at 1.1350. It is 5 pips higher than the ask-price you saw when you placed the order. It was the best price available for the trade, and the trade was settled at 1.1350. This is how Market Orders function.
In Market Order, you could run into a situation where half of your order was filled at one price and rest at a different price. As said in the previous paragraph, your buy order was executed as the broker matched sellers for your buys. If there weren't any sellers with 10 lots but there was a seller with only 5 lots, then the buy order for the first 5 lots will be filled. The rest of the buys will be filled as the broker finds more sellers. The execution price for the two buy orders might be different. The average execution price of the two buys will be used for your buy position. The first buy lot was executed at 1.1346 and the second at 1.1348, then the buy position for the 10 lots will be the average at 1.1347.
The above two scenarios illustrate slippage in a market order. Slippage can happen with any order but is prevalent with market orders. Slippage can happen during volatile markets. Slippage can be positive, negative, or no-slippage.
Slippage
Slippage is the difference between the expected price and the actual price of a trade.
As with any order type, a partial fill is a reality with market orders. The broker could fill your order depending on the number of lots available. If the trade size is large, then the entire lot may not fill. Large banks could run into this problem when they are offloading or taking in large quantities.
Market Order is a buy or a sell order at the current market price
Meant for filling orders as soon as possible
The execution price is not guaranteed
The highest chance of filling the order
Least expensive for execution
When you should use Market Orders?
When you do not want any delay in filling the order
You are trading a few shares, for example, a few lots of currencies or a couple of contracts
The market is very liquid
You do not care about the few dollars in slippage
When you shouldn't use Market Orders?
When the market is not liquid
Since there are few buyers or sellers, an illiquid market is prone to sudden and sharp fluctuations in the price. When you place a market order, your order could trigger a sharp irrational move toward your trade with you ending up with a large negative slippage.
When the trade size is large
When you trade large lots or a few hundred contracts, then using market order for such transactions could be problematic. Even in a liquid market, if the trade size is large, it will be difficult to find a single buyer or a seller for your trade. You could end up with a partial trade and the market could drive the prices up or down towards your trade. You could end up with a large slippage for the rest of your trade.
Timing Instructions for Market Order
Timing instructions include, Good 'till Cancelled (GTC), , DAY and Good 'till Date (GTD)
Good 'till Cancelled (GTC)
A GTC order stays open until it is completed or canceled. This is the default time instruction for Market Orders.
DAY
DAY order that is not completed stays open until the end of the trading day. All open DAY orders are canceled at the close of the trading day.
Goof 'till Date (GTD)
GTD order requires a date as input. GTD order that is not filled by the close of trading on the specified date will be canceled.
Other special order instructions you can use with Market Order
AON or All or None Order is used if you do not want a partial fill for your buy or sell orders.
All or None (AON)
AON orders must be executed in its entirety or not executed at all. Partial execution is not permitted. AON order will remain active until it can is filled or canceled.
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