Different order types explained

What order types are there?

Orders are simply instructions to buy and sell assets that you send to an exchange or broker. There are two main order types: limit orders and market orders.

  • A market order is a request to buy or sell immediately at the current market price.
  • A limit order instructs the broker or exchange to wait until the price hits a level (limit) which you define, before being executed.

Each of these two order types has many different variations that do different things.

limit order market order

Market Orders and Limit Orders

The two main types of orders that are available on almost every major exchange, or broker that you should know about are the market order and the limit order.

What is a market order?

A market order is the most basic type of instruction. It is an immediate buy or sell order at the current price, whatever that may be. Generally, if you buy an asset, you pay a price at or near the posted asking price. If you want to sell an asset, you will receive a price at or near the highest current bid.

It is important to remember that the last traded price is not necessarily the price at which the market order will be filled. In volatile market conditions, when the price is fluctuating rapidly, the price at which your order is actually executed (or filled) may deviate from the last traded price (this can be significant if you are trading in markets with low liquidity). The price will only stay the same if the bid/ask price is exactly equal to the last traded price and there is sufficient liquidity.

Market orders are popular with individual investors who want to buy or sell an asset without any delay. The advantage of using market orders is that you are guaranteed that the trade will be executed; in fact, it will be executed instantly. Although you do not know the exact price at which the asset will be bought or sold, market orders on assets that trade in the tens of millions of dollars per day are likely to be filled at a price close to the bid and ask prices.

What is a limit order?

A limit order, sometimes called a pending order, allows investors to buy and sell assets at a certain price in the future. This type of order is used to execute a trade if the price reaches the predefined level; the order will not be executed if the price does not reach that level. In essence, a limit order sets the maximum or minimum price at which you are willing to buy or sell.

For example, if you want to buy an asset at $10, you can enter a limit order for that amount. This means you won’t pay a penny more than $10 for that particular asset. However, it’s still possible that you’ll buy it for less than the $10 per share specified in the order.

There are two main types of limit orders:

  • Buy Limit: An order to buy an asset at or below a specified price. Limit orders must be placed on the correct side of the market to ensure that they will accomplish the task of improving the price. For a limit order to buy, this means placing the order at or below the current market bid.
  • Sell Limit: An order to sell a security at or above a specified price. To ensure price improvement, the order must be placed at or above the current market ask price.

Some exchanges and brokers offer incentives (such as lower fees, or even rebates) to encourage traders to place limit, instead of market orders. That is because limit orders add liquidity to the market, thus making the market more efficient. When placing limit orders, it’s important that you carefully check the exact price you place the order at, because if an asset is trading at $10, and you misplace a limit buy order at $19, instead of $9, it will usually be executed immediately as a market order instead.

Other order types

Now that you understand the two main orders, let’s dive into the more advanced instructions that many different brokerages allow on their orders.

  • Stop-Loss Order
    One very useful order is the stop-loss order, also known as a stop market order. This order is different because, unlike limit and market orders, which get placed as soon as they are submitted, this order remains dormant until a certain price level is reached, at which point it gets automatically executed as a market order. Some exchanges and brokers may also refer to this as a hidden stop market order.

  • Stop Limit Order
    These orders are similar to stop-loss orders, but as you can guess by their name, there is a limit to the price at which they will be executed. For example, in a stop-limit order, there are two prices which you need to specify: the stop price, which converts the order into a sell order, and the limit price. Instead of the order becoming a market sell order, the sell order becomes a limit order that will only be filled at the limit price or better. This can alleviate a potential problem with stop-loss orders, which could accidentally be triggered during a flash crash when prices fall but then quickly recover.
  • All Or None (AON) orders
    An AON order guarantees that you will either get the full amount of an asset you requested or none at all. This is usually useful when an asset is very illiquid or when there is a limit on the order. For example, if you place an order to buy 1000 Dogecoins but only 500 are sold, an all-or-nothing restriction means that your order will not be filled until at least 1000 coins become available at your desired price. If you do not place an all-or-nothing restriction, your order to buy 1000 coins will be partially filled for 500 coins.
  • Immediate or Cancel (IOC) order
    An IOC order instructs the broker to place a limit or market order for an extremely short period of time (sometimes even less then a second) and guarantee its execution in that time interval, and cancel any remaining amount of the order, which doesn’t get filled. If no part of the order gets filled in this “immediate” interval, then the whole order gets cancelled. This type of order often gets used by algorithmic traders.
  • Fill or Kill (FOK) order
    This type of order combines the characteristics of an an All or None order with those of the Immediate or Cancel order. Simply put, it is essentially a FOK order, that must be executed in a specified time interval. If the whole order isn’t executed in that interval, it gets cancelled automatically.
  • Good ‘Til Cancelled (GTC) order
    This order type is similar to the IOC order, but you can impose a much longer time restriction. For example, you can place a Bitcoin limit buy order for $1000, at a price of $10 000, active for 30 days. If the order doesn’t get filled within 30 days, it automatically gets cancelled.
  • TWAP/VWAP orders
    A Time-Weighted Average Price / Volume-Weighted Average Price (TWAP/VWAP) order is often used when you want to trade extremely large amounts of capital, in a short time frame, which, if executed as a market order, could cause large price fluctuations (slippage). TWAP/VWAP orders essentially split what would be one large market order evenly over a specified period of time into many smaller orders. The volume weighted average price (VWAP) balances execution and the total trading volume in the market during a given period. Often, a VWAP order consists of buying or selling, for example 40% of the total amount in the first half of the day (when fewer people trade, thus liquidity is lower) and then the remaining 60% in the second half of the day when trading volume is at its peak. In the case of a TWAP trade, the execution volume will likely be split 50/50 in the first and second half of the day, or say, 10% of the total amount each hour, spread over 10 hours. High volume traders can utilize TWAP and VWAP to buy or sell very large amounts, while keeping the markets stable and not impacting the price.

Some key questions

What is an order?

An order is an instruction to buy or sell assets which you send to an exchange or broker.

What order types are there?

The main order types are market orders and limit orders.

What is the difference between a market order and a limit order?

A market order gets executed immediately at whatever the current market price is. A limit order allows you to specify an exact price you want to buy or sell an asset for.

Which order type is the best?

Like many things in life, there is no best order type. Both limit orders, and market orders have their advantages, and disadvantages, which is why many other, more advanced order types exist.

In short, think of it like this:

  • If you want to buy or sell an asset immediately, usually a market order is your best bet.
  • If you want to only buy or sell an asset at a specific price, and you are certain that price will eventually be reached, you can use a limit order.
  • If you want to buy or sell very large amounts (usually in the tens of millions of dollars), you can look into TWAP/VWAP orders.
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