InvestorQ : How do I decide when to place limit orders and when to place market orders?
Radhika Arya made post

How do I decide when to place limit orders and when to place market orders?

Neha Samdani answered.
3 years ago

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.

Are the markets trending currently? 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 works better in case of phased buying or selling? What do you do if you have adopted a phased approach to buying or selling the stock? A phased approach like an 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.

How to deal with mid cap and small stocks? Can we use the same logic for mid cap stocks also as in the case of large cap stocks. 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 ways 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.

What kind of orders should intraday traders place? Are there are any specific considerations in case of intraday traders? If you are an intraday trader, then 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.

Placing order is not just limited to limit orders and market orders. There are also orders like IOC (Immediate or Cancel) orders, which have been under exchange ban for some time. 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.