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Market Order - What is it and How to Use it?

Updated Jan 05 2021

Market Order - What is it and How to Use it?

Table of Contents:

Market Order Explained

A Market Order is a type of trading order designed to achieve instant execution upon availability by buying or selling an asset at the best price available at the time of execution.

Market orders never guarantee a particular price, you never know what you could end up getting as everything really depends on availability.

Important note: Market orders get executed instantly, if you click the buy or sell button, there’s no going back.

Market Order

Look at the example above: a trader placed an order to buy 100 shares and the price of the asset was $15.

In that precise moment of time, there are 2 sources of liquidity (availability):

The moment that the trader clicked buy at $15, the following scenarios could happen:

With market orders you never know what could exactly happen.

I know what you’re thinking: this sounds scary!

Yes, it does, but it’s not that bad as it sounds, we just presented all possible scenarios. In reality this depends on 2 different variables: liquidity and volatility.

In an extremely volatile market where prices can swing before we can blink our eyes then yes, we have no clue what price that market order can get us.

In a low liquidity asset then if no one is executing market orders and there are just a few pending orders on the exchange’s book then yes, we also could end up getting a horrible price. Maybe there were only 5 pending orders with a $2 difference in price each and our market order ate them all.

How to Place a Market Order

Market orders are the simplest of all order types, placing them is as easy as opening your trading platform, choosing an asset, selecting the quantity of the asset and clicking either on buy or sell.

An example of placing a Market BUY order:

Buy Market Order

An example of placing a Market SELL order:

Sell Market Order

Remember, market orders are called like that because you get the MARKET price and you can never be sure which price it will be, specially on high risk conditions such as low liquidity and extreme volatility.

Advantages of the Market Order

These are the main advantages of a market order:

Disadvantages of the Market Order

The main disadvantage of a market order is:

That’s why this type of order regardless of it being simple requires understanding of the conditions where it’s being used to ensure you don’t go broke or watch your account disappear.

Remember, be careful with low liquidity and high volatility.

When should you use a Market Order?

Market orders are commonly used when:

Remember, market orders are all about prioritising execution above price.

A good example of this would be:

Same example applies if you know that a stock you own will go down or the company will declare bankruptcy tomorrow and disappear, you don’t care the exact price you get, you just care about getting a price.

Common Market Order Mistakes

Market Order Common Mistakes

These are the most common market order mistakes (the first one is my personal favourite):

Hope this guide was helpful,

Enjoy!

Market Order - What is it and How to Use it?

Author

Stefano Treviso

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