When learning to trade stocks, many people question what type of order they should use. Limit Order or Market Order? Some factors should be considered when deciding to use limit and market orders. When using Breakout Theory, typcally market orders are used. When the market is in momentum, the position must be taken immediately. Market orders get filled immediately.
Other Types of Orders
During breakouts the market’s directional movement is moving very fast. Waiting for a bargain price using a limit order can cause us to miss the trend. Our limit order will not get filled and the market may continue to climb. It’s important to consider which is more advantageous based on the situation.
Disadvantage of the limit order: Say the stock is in momentum, and you put a limit order price at $24.23 and the stock climbs to $25.00, your order will not get filled. Later in the day if the stock is in momentum it’s now at $26.00, again your order will not get filled, and you have missed the move. The market price must come down to your limit price to get executed and filled.
Disadvantage of Market Order: You may pay a slightly higher price. Usually a few cents. This is insignificant when trend trading. When we use a trend trading strategy like Breakout Theory, we are not trying to beat the spread, WE ARE TRYING TO BEAT THE MARKET. We do not try and scrape a few dollars or points for profit. We are here to hit the home run.
Market Order: A market order is executed immediately at the “Ask Price” at that moment. In other words, whatever is quoted at the moment is the price you will get filled at. Your order is almost filled immediately. This is best in a fast moving market when trading breakouts or using Breakout Theory trading, which try to capture longer and bigger trends.
Remember: Depending what type of trading system you are using, determines what type of order you will use. The above applies to Breakout Theory Trading System. It is a trend following system that seeks to catch the major move in the stock market. When we trade breakouts the markets are in momentum and moving very quickly, you need to get in immediately so you do not miss the move.
Limit Orders are great for Day Trading: In shorter term trading strategies, like scalping, day trading, and swing trading stocks. You are trying to capitalize from smaller movements in the stock market, and making a larger bet. In this case, using a limit order can be very crucial. A few cents spread can mean the difference between a profit and a loss. Limit orders become more important as the time frame traded becomes smaller.