Market Orders Explained: Definition and Examples
Ryan Thaxton October 19, 2021 11:20 AM
Market orders are one of the most common order types when trading live markets like forex. Learn how market orders are placed and what to look out for when placing them.
What is a market order?
A market order is an instruction to purchase or sell a certain security at the best available price as soon as possible. Market orders are usually issued by an investor to a broker or brokerage, but they can also be placed directly on live trading sites like FOREX.com.
Market orders are known as a quick and reliable transaction method, but traders do incur a slight risk when issuing a market order. Market orders are set to trade at the soonest available time and not at a specific price, so there can sometimes be a difference between the price quoted for the market order and the actual price it is executed at.
Market orders for forex trading
Market orders are one of several forex order types, but they are the most vulnerable to the price discrepancies mentioned above, known as slippage – this is the biggest risk when opening or closing a position in forex through a market order.
Without slippage, a typical market order when trading forex would work like this:
If the bid price for EUR/USD is 1.1748 and the ask price is 1.1750:
- A market order to buy would execute at 1.1750
- A market order to sell would execute at 1.1748
If the currency pair is experiencing high volatility, the execution price may be one or several pips different as negative or positive slippage occurs during the transaction.
You can trade forex with FOREX.com using CFDs, with spreads from 3pts. Follow these easy steps to start trading over 80 currencies.
- Open a FOREX.com account, or log in if you’re already a customer
- Search for the currency pair you want to trade in our award-winning platform
- Choose your position and size, and your stop and limit levels
- Place the trade
What to know when placing a market order
Market orders are set to execute instantaneously, but there are several instances where the price you set will differ from the price a market order is executed at. When placing a market order, you should consider time, volume, and volatility to ensure the price you see is the price you trade at.
Price changes during market order executions are most common when placed outside of market hours. Fundamental economic events like after-hours earning calls, economic data releases, and major world events can cause a security’s price to jump multiple points in either direction while the markets are closed. This discrepancy in price from when the market closed to when it reopens is known as ‘gapping’ and can drastically change the outcome of your market order if issued outside of market orders.
Trading forex is different from most other securities because the market doesn’t close during the week, but gapping can still occur when specific currency markets close for a weekend or holiday.
Market orders are most often used to enter a position. Because of the risks outlined above, other order types are often used when exiting or adjusting positions. Below we compare market orders to several different order types and give examples of the best situations to use for each.
Market orders vs different order types
Market orders are the most commonly issued order when buying securities, but there are several other order types frequently used to close positions or mitigate risk. Other common order types include limit orders, stop orders, batch orders, and good for day orders. They all function in different ways, and some can even be combined with one another to give you optimal control over your trade.
Market order vs limit order
The most significant difference between a market order and a limit order is the time and conditions at which the order is executed. Compared to a basic market order, limit orders give you slightly more control over the conditions at which a trade is executed.
A limit order, sometimes called a pending order in forex trading, limits when an order is triggered to a specific price point. Limit orders are executed only when the price specified in the order becomes available. This is different from market orders which are executed immediately at the best available price.
Limit orders are differentiated into limit open and limit close orders. A limit open order is set to buy at a specific price; a limit close order is set to sell at a specific price. It is important to note limit orders will execute only if the security hits the specified price or better. However, if the price then moves against you while the limit order is being filled, the limit order will only be partially filled.
Market order vs stop order
While market orders are immediate transactions, stop orders are designed to become market orders once a specified price is hit. They are like limit orders in that they are triggered at a set price, but once they are triggered, they are executed in full like a market order.
Stop orders are often put in place to prevent you from potential losses. You can set a stop order to sell a security if it falls to a specific price, which becomes a market order once it is triggered. This is called a stop loss order. While you must monitor and immediately place a market order to prevent taking major losses when a security’s price dips, stop orders act as a fail-safe, selling the specified amount of an investor’s shares when the security hits a predetermined low price.
You can also place a stop order to buy a security at a certain price, ensuring you open your position in a security before the price becomes higher than what you would like to buy into.
Stop orders can also include a limit modifier to become stop-limit orders. Stop-limit orders are used mainly when selling off securities as they ensure your trade is executed with a specific amount of profit.
Slippage can still occur when using stop loss orders to trade forex. If high volatility causes the price to completely skip over the price set in your stop order, the order will still be triggered and sold for less than the target price. So, while stop loss orders function as good fail-safes, they are not always reliable.
Market order vs batch order
While a market order can be placed at any time, batch orders are placed only once a day at the start of market hours. A batch order aggregates all orders placed before a market opens, including market, limit, and stop-loss orders.
While a market order can be placed at any time, if placed outside of market hours it will trigger with the batch order at the market’s open.
Market order vs good for day order
A good for day order is one of several orders based on the duration of time it remains open. While a market order is placed to transact immediately, a good for day order remains open for the duration of the market day and are often used in conjunction with limit and stop orders.
Limit and stop orders modify the price at which a trade is conducted compared to market orders, and good for day orders limit the amount of time a trade stays open compared to a market order’s instantaneous trade.
There are several different order duration types. Good for day orders are the default setting on most trading platforms
Other examples of duration-based orders are good ‘till canceled (GtC) orders where the order remains open indefinitely until it is filled or canceled and immediate or kill (IoK) orders in which any part of the order that cannot be filled is canceled, allowing for partial fills of the order.
Market order vs after-market order
An after-market order (AMO) is simply a market order that is submitted while markets are closed. These orders are grouped into the larger batch order that goes through once the market opens.
In forex trading never really stops, because while a currency’s main market may be closed, its related currency pairs can still be traded through foreign brokerages and banks. The only drawback is that the market will be less liquid than if the currency’s main market where to be open. After-market orders therefor are not applicable to forex trading.
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