Market Order vs Limit Order in Forex Which One Should a Beginner Use?
Discover how market and limit orders work in forex. Learn the pros and cons of each to make smarter trading choices. Perfect for beginners.
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A market order in forex implies that you either sell or buy at the best price that is currently available. It is quick and convenient when you need to get in or out of a trade. The disadvantage is that in a fast-paced market, the price can fluctuate before your order is fulfilled. This is known as slippage.
A limit order in forex allows you to specify the price at which you wish to buy or sell. Your business will not be done at less than that price. The advantage is that you have more price control, but occasionally the order might not be filled when the market never hits your desired level.
What Is a Forex Market Order?
The simplest form of order is a forex market order. It involves selling or buying a currency pair at the best price in the market in real time. Market orders are used by traders when speed is more important than the price. A market order will take you into the market as soon as EUR/USD is moving rapidly, and you wish to ride the trend.
The primary advantage of a market order is that it is executed quickly, which is handy when there is news or when you need to get out of a losing trade quickly. The disadvantage is that there is a chance of slippage where the final price is a bit different than what you anticipated. Market orders are simple and convenient, but they do not always imply the price you observe.
What Is a Forex Limit Order?
A forex limit order enables you to specify the price at which you wish to either sell or buy a currency pair. It is not executed immediately as a market order. Rather, it remains open until the market hits your desired price or higher. This provides you with greater control of entry and exit levels.
Using the example of EUR/USD, you have a price of 1.0850 and you only wish to buy at a price of 1.0800, then you can place a buy limit order at 1.0800. The order will be filled only when the market shifts to that price, and you will not enter the market at a higher level than you desire.
The primary benefit of a limit order is that you are certain of the price you will pay or sell at a price lower or higher than your specified price. The disadvantage however, is that your trade might never be fulfilled when the market fails to reach your level.
Why Does Slippage Happen in Forex? Can Limit Orders Avoid It?
Slippage is one of the biggest worries of new traders. We can divide it into steps.
What Is Slippage in Forex?
Slippage is the difference between the price you anticipate and the price you receive. You can use the example of placing a buy order on EUR/USD at 1.0850, and your order is filled at 1.0853. This normally occurs in the fast moving markets, like when news releases are being made, where the prices fluctuate at a very high rate.
Why Does Slippage Happen?
In forex, the prices fluctuate within seconds. When there are numerous traders making orders simultaneously, the price you are looking at on your screen may be obsolete before your broker can fill it. The more the market moves, the more the chances of slippage.
Will Limit Orders Eliminate Slippage?
Yes, a limit order can assist you in avoiding slippage since it will only be executed at your preferred price or higher. When the price soars above your price, the order will not be filled. This protects you against paying higher or selling lower than you desired. The trade-off however, is that in some cases your order might never be triggered and you might miss a trading opportunity.
Will My Limit Order Always Get Filled?
The most frequently asked beginner question in forex trading is: Will my limit order always be filled? The answer is no. A limit order is only executed when the market hits your desired price or higher. The order is open and may expire without being filled when the price fails to reach your level.
This is a plus and a minus. The benefit is that you can control the price completely. You know the price you are prepared to pay when purchasing or the price you desire when selling. This prevents the possibility of slippage that may occur with market orders.
The drawback is that you may fail to trade. To illustrate, when EUR/USD approaches your limit price and reverses before reaching it, your trade will never be executed. Although this will save you the trouble of getting into a bad level, it also implies that you might miss out on possible profits.
Other brokers permit partial fills, i.e. only a portion of your order is filled in case there is not sufficient liquidity at your desired price. This is more typical in very large trades, but it is good to know as a beginner.
Limit orders are great to manage, not to trade.
Market Order vs Limit Order Cost: Do I Pay More in Spreads or Fees?
In comparing a market order and a limit order in forex, the question that beginners tend to ask is whether one is more expensive than the other. The fact is that both types of orders have their cost considerations, which are primarily associated with spreads, execution price, and broker conditions.
1. Market Order Costs
- A market order is executed at the best available price.
- You pay the spread, the difference between the buy and sell price (bid and ask).
- Slippage can result in a worse final fill price than expected in fast-moving markets, and this is an additional hidden cost.
- Pro: You do not have to wait to enter the market.
2. Limit Order Costs
- A limit order will only execute at your preferred price or better.
- You still pay the spread when your order is filled, but you do not slip since the price cannot be lower than your set level.
- Other brokers can impose a small fee when your order remains pending over a long period, but this is less frequent.
- Disadvantage: Your order may never be filled, that is, you miss a trade opportunity.
Which Costs More?
- High volatility tends to lead to increased market order costs in terms of slippage and spreads.
- Limit orders are usually cost-effective in that they control the entry price, but they are disadvantaged by missed trades.
To the novice, the decision is based on priorities: When speed is paramount, pay the price of a market order. Limit orders are used to prevent the occurrence of unexpected costs in cases where price control is more important.
How to Use Market and Limit Orders in News-Driven or Volatile Markets
News events like central bank announcements, jobs reports, or unexpected global events tend to cause the forex markets to move the fastest. This is exciting and dangerous to novices. It is quite crucial to select the appropriate order type at such times.
A market order is handy when you wish to respond immediately. As an example, when positive news pushes EUR/USD higher and you want to get into the market right now, a market order will put you in the trade right away. The disadvantage is that volatility usually leads to slippage and larger spreads, and you can end up paying more than you thought.
A limit order is better when you wish to wait until the price attains a certain level before you can trade. To illustrate this, instead of buying at a high price, you can set a buy limit at a lower price at which you feel comfortable. This prevents emotional trading but at the cost of missing the trade in case the market does not revert.
The most prudent way to go as a beginner is to mix these orders. When you need to be fast, you use market orders, and when you need to be in control and patient, you use limit orders. Volatility and risk management should always be kept in mind.
Smart Tips for Beginners: Combining Limit Orders, Stop-Loss & Risk Management
Stop-Loss Every Trade.
Add a stop-loss, whether you are making a market order or a limit order. This cushions you against huge losses in case the market works against you. This is one of the most crucial aspects of forex trading that beginners tend to overlook.
Limit Order Plan Entries.
Limit orders are great for planning trades. Rather than pursuing the market, determine the price level you desire and have the limit order wait for you. This will prevent emotional choices and will provide you with greater control.
Position Size Risk Management.
Do not put too much on one trade. Test strategies with smaller position sizes. The market may turn on you even with the best orders, so secure your account balance.
Combine Orders to Improve Results.
The clever thing to do is to place a limit order to buy, a market order to sell when necessary, and a stop-loss to protect. In this manner, you strike a balance between speed, control, and risk management.
Conclusion
Both limit orders and market orders play an important role in forex trading. Limit orders are control orders, and market orders are speedy. The best alternative is dependent on your trading style and goals. At Beirman Capital, we take novices through the process of learning these tools and applying them prudently with appropriate risk management. Have questions or need personal help? Contact us and start your forex journey.
