what is market order and limit order

There are always two prices in Forex


2021-07-13 19:21:00

There are always two prices in Forex - supply and demand, Bid and Ask, respectively. The first of these is the price at which a market participant can sell currency. This, in fact, is the price from the buyer. The second is the price from the seller, at which you can buy currency. In order to perform operations, you first need to put an order as you are not allowed to participate in market activity directly. Trading on the market is carried out through a broker. In order to perform an operation (buy or sell an asset), the market participant instructs their broker to perform an action. Currency exchanges use a system of orders for this purpose. If you interested in such type of activity, you need to know - what is market order and limit order? 

A market order is a request to buy or sell a particular currency at a price that is currently set on the market; this assignment is given by the market participant to their broker. For example, Forex trader 1 wants to open a short position for 400,000 GBP/JPY using a market order. At the same time, trader 2 placed an order to buy GBP/JPY at a price of 1.5876 of 300,000 and client 3 placed an order to buy GBP/JPY of 200,000 at a price of 1.5878. Hence, the order of the first trader will be executed at 1.5877 since (200,000*1.5878+200,000*1.5876)/400,000=1.5877.  

Market orders involve such orders as Buy Market and Sell Market. If a market participant places a Buy Market order, then they express their intention to buy an asset at a set price. The specified order is executed according to the currently available market Ask price. A Sell Market order indicates that a market participant wants to sell an asset at the current market Bid price.  

There are 4 types of pending orders. These are: Sell Limit, Sell Stop, Buy Limit, Buy Stop; although for now we are more interested in limit orders. Limit order is placed in order to buy or sell a certain quantity of an asset at a specified price or at a better one. Limit orders also allow an investor/trader to restrict the time period when they are valid, that is, they define the period when they will be open and after which they are automatically canceled. 

Limit orders are usually more expensive (in terms of commissions to the broker, if any) than market orders. Despite this, limit orders remain profitable because investors receive what they want at a desired price in the process of trading. Limit orders are especially useful at low trading volumes or in very volatile markets. A limit order can be placed in an existing open position (for both long and short positions) for fixing profits.  

For example, a stock market trader opened a short position on 100 shares of company X at a rate of $12.50 expecting that the stock market will fall. At the same time, they expect that the market will fall to the next support level of $10.00. The trader decides to fix the profit at $10.30 and put a limit order to purchase 100 shares. If the stock price of X indeed falls to $10.30, then the order will be executed and the trader will get the profit in the amount of: 100*(12.50-10.30) = $220. 

What conclusions can we draw? The variety of orders gives incredible opportunities to the market participants. You are left with very little - learn about existing tools as much as possible, learn how to use them and make a profit. Different types of orders have their advantages and disadvantages, provide various opportunities for implementing trading ideas and even offer basic elements for automated trading. Since novice traders often make mistakes when putting specifications of a trade order in, it is very important to try to apply certain types of orders in a demo account. 


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