What is a market order?

In crypto, a market order is an instruction to buy or sell an asset at the best current market price. By placing a market order, you're looking to execute a trade immediately. This order type is commonly used by traders, and orders are typically (but not always) completed instantly when there's enough liquidity available in the market.

Market orders are an alternative to limit orders, which are an instruction for a platform to buy or sell an asset at a specific price set by the trader. Understanding market orders is fundamental to a well informed trading strategy. In this article, we'll explore what a market order is in more depth, how market orders work, and the advantages and disadvantages of the order type.

TL;DR

• A market order is an instruction to open a position immediately at the current market price. Although the order type aims for instant completion, this isn't guaranteed because of factors including volatility and liquidity.

• Market orders bring simplicity and speed to crypto trading because you avoid the need to decide an entry price for your position, as is the case with a limit order.

• Market orders do have their limitations, including a lack of control over price completion, slippage, and the potential for higher fees.

• When trading through a market order, it's important to understand and factor in the current market volatility plus the execution speed and order book depth of your chosen trading platform. These factors can influence the completion price when opening a trade and, therefore, the gains to potentially be made.

Why it’s important to understand market orders

By understanding market orders and the right circumstances to use them, you're better equipped to react to changing market conditions — an important strength given crypto's inherent volatility. Meanwhile, it's worthwhile to understand the nuances of this order type so you're better equipped to make a decision on market orders versus limit orders, and when to use each.

Being fully informed can help you avoid missed opportunities for successful trades that you identify through technical analysis (TA). If you're new to trading, understanding market orders should be one of your earliest lessons given how common this order type is.

How market orders work

To complete a market order, you simply choose the 'buy' or 'sell' option on your chosen trading platform. A buy market order is placed with the expectation that prices will rise, while a sell market order is placed when you believe prices will fall. The trading platform will immediately go to work finding a buyer or seller of the asset in question (depending on which option you chose), and will fill your order at the best available market price. The more liquidity in the market, the easier it will be for the platform to complete the trade.

Market orders provide you with immediacy and simplicity when opening new positions, supporting the implementation of your trading strategy with confidence and precision.

Types of market orders

As explained above, there are two types of market orders — buy and sell orders. Your decision over which option to choose depends on various factors.

First, the technical analysis you complete to gain signals (but not guarantees) over whether an asset's price will rise or fall. Second, the market sentiment. In other words, how bullish or bearish traders generally are about the asset's prospects, which can impact price action. Third, the time period you plan to hold a position open for. Even in bullish markets where prices are generally rising, there's still opportunities to succeed with a sell market order as prices fluctuate in the short term.

You can complement a buy or sell market order by also applying a stop-loss (SL) or take profit (TP) instruction — two essential risk management tools. Setting a SL instructs your trading platform to automatically close a trade at a specific price if prices move against your expectations, preventing further losses. TP, meanwhile, is an instruction to automatically close a trade when prices rise (in the context of a buy order) or fall (in the context of a sell order), and your market order position is therefore showing a gain.

Advantages of market orders

Near-immediate completion

As stated, when a market order is placed, the trading platform will attempt to fill the order as quickly as possible, giving you the best possible price at that moment in time. That's powerful in the crypto markets, where prices can change rapidly and slippage — the difference between a trade's expected price and the actual price at execution — can eat into your gains.

High likelihood of completion

Although there's no guarantee your market order will be completed, the likelihood is higher when compared to a limit order. To complete your market order, the platform simply needs to find a buyer or seller to fill the opposite side of your trade. That's why many traders look for high liquidity when choosing an exchange to trade crypto.

Simpler order placement

Market orders are simple to place, requiring you to choose buy or sell. Of course, this decision should only follow careful and thorough technical analysis and research which isn't simple, but the act of placing a market order is. That's why this order type is appealing to beginner traders in particular. It allows them to open positions, actively trade, and develop their skills in a manageable way.

Disadvantages of market orders

Less control of price

Because a market order is completed at the current market price but prices are always fluctuating, you won't have total control over the exact price your position opens at. That can be a problem during periods of high volatility where asset values can rise and fall quickly and significantly, leading to a less favorable price.

Slippage can be encountered

Related to the lack of control experienced with a market order trade is the challenge of slippage. Slippage refers to the difference between the expected price of an asset and the actual price you receive when the order is filled. Slippage can be caused by low liquidity, high volatility, and when a large trade is made that exhausts the available liquidity at a specific price level.

Potentially higher fees

Higher fees are another disadvantage sometimes encountered with market orders. That's because traders who place market orders are considered a 'taker' — meaning they take liquidity out of an exchange. This is in contrast to 'makers' — the label typically given to traders who use limit orders because they're seen to be providing liquidity. In other words, they're a market maker.

Factors to consider when using market orders

Market volatility

Many would agree that volatility is one of the most important factors to consider when placing a market order because of the lack of control you'll have over the final price at completion. If volatility is high, consider if a limit order is a better option because of the added control it provides.

Execution speed

The execution speed of your chosen trading platform is another factor to keep in mind because of its impact on the final price at completion. High volatility coupled with a low execution speed can lead to high slippage which potentially eats into your gains.

Order book depth

Also related to volatility and liquidity is the order book depth. A deep order book is a sign of high liquidity which, in theory, should signal less volatile prices and lower risk of slippage. Meanwhile, if you're planning a large trade, you can also check the order book depth to better understand how the trade will impact the asset's price. Generally, the lower the depth, the greater the impact of a large order.

Common mistakes to avoid when using market orders

Not using a stop-loss

Although market orders are often preferred because they avoid the need to define an entry price, it's important not to neglect the stop-loss. Using a stop-loss can minimize your losses should prices move against your expectations. Deciding where to place a stop-loss depends on your risk tolerance and the wider market volatility. Risk-averse traders may set a stop loss just 1% below or above the completion price (depending on if a buy or sell order is placed), while those with a stronger risk appetite might stretch to 20%.

Infrequent technical analysis

Technical analysis shouldn't be an activity you complete once and then park until your position plays out. With the market and the forces affecting it constantly changing, it's wise to complete TA frequently, so you're prepared for your next move. For example, you may identify a need to shift the time horizon of an open trade because of a change in the market, allowing you to secure a gain and unlock funds for a different entry later on.

Trading on emotion

Market orders may allow for instant entry into a market, but that shouldn't mean rushing in with an emotion-led trade. Although a thrilling price rise might hint at sustained bullish sentiment you won't want to miss out on, it's still vital to trade based on logic and evidence. And of course, never trade with more than you're prepared to lose.

Over reliance on market orders

While it's helpful to be confident using market orders, there’ll likely be times when an alternative approach is more beneficial to your trading success. We always recommend building your knowledge of other order types and other strategic methods so you're as prepared as possible to respond to the market with a carefully thought out approach.

Hypothetical examples of a market order

1. Imagine a trader executes a sell market order to trade $200 worth of a token that's trading at $0.50. The token and wider market are stable, and liquidity on the trading platform is high. A sell market order is placed and the platform confirms an executed price of $0.52. Although this represents a slight rise in the expected price, the slippage is minimal, and our trader is happy with the confidence that a drop in value is approaching.

2. Imagine a trader enters a buy market order to secure $300 worth of an altcoin that's trading at $0.50. The trader has spotted an opportunity to buy the dip, as altcoin prices have been trending downwards all week. The order is placed, but the executed price rises unexpectedly to $0.60 per token due to low liquidity on the platform. Because of the slippage, the order would only buy 500 tokens, instead of the 600 tokens the trader originally hoped their trade would provide them with.

These examples demonstrate the reality traders face when using market orders in changing conditions, where a lack of complete control over prices can impact the success of a trade.

The final word

A market order is one of the most common ways to open a position in crypto trading. That's why it's essential for traders of all experience levels to understand the order type in the context of the various other crypto tools available today. With a market order, the goal is to complete a trade near-instantly and as close to the current market price as possible, bringing speed and simplicity to your crypto trading strategy.

Although the market order does have its limitations, with effective risk management you can shield your trades from some of the volatility and increase your chances of success.