This is a detailed topic that we won’t dive too deeply into yet. For now, remember two important things about order types:
- Limit orders limit your risk of getting a bad price — but at the cost of not guaranteeing your order will fill.
- Market orders almost guarantee that your order will be filled immediately, but at the risk of getting an unfavorable price.
You can enter and exit the market with Limit or Market orders. Market orders will buy at the price of whatever the best available seller has placed their order for. Market orders to sell will do so for the best available price of the buyers available. If your order size is large or the nearest buyer or seller removes their bid or offer, you could be subject to getting the next best price which may be far worse than you expected.
Limit orders can be thought of as “This price or better”.
Read that previous sentence several times and commit it to memory. It will save you a lot of mental energy in the future if you can secure your understand of this idea now.
- If you enter a Limit order to Buy for 120, you are saying “I will pay 120 or better”. As the buyer, “better” means lower.
- If you enter a Limit order to Sell for 125, you are saying “I will sell for 125 or better”. As the seller, “better” means higher.
Many times, you will come across the term Limit in trading literature as a way of describing a profit target. This is a different concept and should not be confused with order types.
It’s beyond the scope of this lesson to describe which type of order to use for different situations. However, most professional traders use Limit orders for a vast majority of their trades.