WHEN YOU ARE AN INTRADAY TRADER OR A SHORT TERM TRADER THE COST OF TRADING MATTERS A LOT. THEREFORE THE LEVEL OF ENTRY AND EXIT MUST BE PROPERLY TIMED. NORMALLY, IT IS NOT POSSIBLE TO ENTER THE BOTTOM OR EXIT AT THE TOP AND THAT IS WHERE THE ORDER TYPES COME IN HANDY. BASED ON YOUR EXPECTATIONS AND YOUR REQUIREMENTS, THE ORDER TYPE CAN HELP YOU GET THE BEST PRICE. WHILE A MARKET ORDER IS PLACED TO BE EXECUTED AT THE BEST AVAILABLE PRICE AND QUANTITY, THE LIMIT ORDERS DEFINES THE PRICE FOR EXECUTION. THE LIMIT ORDER WILL ONLY BE EXECUTED IF THE PRICE IS THE LIMIT PRICE OR BETTER, NOT OTHERWISE
UNDERSTANDING THE POWER OF MARKET ORDERS
A market order is placed to be executed in the open market itself. The trading mechanism on the NSE is automatically designed to execute the orders on the basis of Price/Time priority. What it means is that irrespective of what price you ask for, the order will be executed at the best price only. That means the purchase will be done at the lowest possible price and the selling will be done at the highest possible price. Of course, in case of market orders, there are no price conditions so the system will automatically execute the orders based on the best price and available quantity. Market orders work well when the markets are uni-directional. If you are buying in a falling market or selling in rising market then market orders will work best as they will help you to realize the best possible price. However, the trader needs to be careful about placing market orders when the market is too volatile or when the market liquidity is too thin and the basis risk is too high.
UNDERSTANDING THE POWER OF LIMIT ORDERS
Limit orders are a more specific type of order where the best price is also mentioned in the order as a necessary condition. So if the stock of RIL is quoting at Rs.940 and you want to buy the stock at Rs.930 then you can set that as your limit price. What it means is that the order will only get executed at Rs.930 or lower. Even if the price of the stock goes to Rs.931 and bounces back then the order will not be executed as it does not meet the market price condition. The market order will be executing at the limit price or lower in case of buy orders and at the limit price or higher in case of sell orders. The limit order works perfectly in case of markets that are very volatile. In such cases, market orders can get out of hand and limit orders can manage risk a lot better. As a trader, you need to remember that limit orders can also be modified based on the evolving market conditions and can even be cancelled if the price movement is not favouring the limit order. Limit orders are also flexible in the sense that they can be converted into market orders if required.
“When you trade, a lot predicates on how you place orders as that has an important bearing on your price of entry and your overall cost” – Anon
6 WAYS TO SELECT A MARKET ORDER VERSUS A LIMIT ORDER…
- One of the first criteria to select the type of order is based on whether the markets are volatile or not. When markets are too volatile, market orders can be counterproductive. That is because; you may end up getting the stock at a price that is away from your trading plan. That will have a downstream impact on your profits and your ROI. In volatile markets, it is a limit order that works best.
- Market orders work best in case of trending markets. When the stock price is falling, it is always better you try to buy through a market order. That is because when the price is falling you are more likely to get a better price by opting for a market order. It is hard to set a limit order because volatility makes the market charts a lot harder to predict. The same rule applies when you are selling into a market that is trending up.
- What do you do if you have adopted a phased approach to buying or selling the stock? A phased approach like a SIP or SWP provides automatic insurance against volatility. If you try to place limit orders in a phased approach then it is waste of time. A better way is to opt for market orders when you already have the advantage of a phased approach working in your favour.
- When it comes to mid-cap stocks and small cap-stocks, market orders are strictly not advisable. Either the basis risk is too high in these stocks or the stock prices are just too volatile. Either way, you are likely to take a hit if you opt for a market order and limit orders will work a lot better in case of such mid-cap and small-cap stocks.
- If you are an intraday trader, then the most critical thing you need to consider is the risk-return trade-off. When you place limit orders, it becomes a lot easier to measure your risk-return as compared to market orders. As an intraday trader, make it a point to always focus on limit orders only.
- Once you decide on your order type (market order versus limit order), you can then focus on a more granular approach to orders. You can then choose whether you want to place a GTD order or a GTC order or an IOC (Immediate or Cancel) order.
MAKE YOUR ORDER CHOICE CAREFULLY AND APPROPRIATELY
You may not realize but the choice of your order type based on the market conditions makes a lot of difference. When you sit down to write your daily trading diary, you will realize that a lot of the shortfalls in performance actually arose out of the wrong type of order place. In fact, that is where it all starts!