Trader Tip: Market or Limit Order? One of the key elements to the Blue Point Trading Trade Plan framework is Order Management (see link below for a full description of this). Often an overlooked part, but often can be a make or break part of your Trade Plan. The question and principle I would like to discuss is the issue of, should I use market or limit order to execute the Trigger within my Trade Plan?
This point has two elements to it. The first aspect is your personal availability when trading the markets. We always state, that Trade Plans not only have to be sound in terms of the trading strategy but as well fit your personal availability. Hence, Trade Plans very often need to be tailored to each trader. Trade Plans (e.g. continuation strategies), where perhaps you are trading “price patterns,” one can anticipate where the Trigger point is. For example, a Fibonacci retracement on multiple 1-hour timeseries bars, may not require you to present. Limit orders here can be quite good for these purposes, to get your Trigger executed for your Trade Plan.
Other Trade Plans for example, when trading Doji candlesticks on a 15-minute timeseries chart, one must be available to watch the markets real-time. Typically Trade Plans (e.g. breakout or counter-trend strategies), where price action is quick at the Trigger point, you need to be present at your trade desk to trade these types of Trade Plans. Which brings us to the second point, what is wrong with using a limit order to get an extra pip on the Trigger entry instead of a market order?
This second point is what I call the illusion of limit orders. Let’s take an example. Let’s say you are trying to get into a trade (based upon your Trade Plan Trigger). You need to get in – a market order will do this. But you are thinking, if I limit order in, I could potentially earn an extra pip or two. Let’s examine what the results on 100 trades might be:
- You will get 90% of the trades filled with an additional pip each. This is +90 pips extra – FANTASTIC!!!
- BUT, because 10% of the trades are not filled, 100% are guarrenteed to be a loss of oportunity, as they were ALL winning trades.
- If your average winning trade is a conservative 20 pips (could be worse), your lost opportunity is -200 pips – not so good.
The point here is, when one adds the net wins and losses, it was a losing Order Management strategy. This “Ticky Tick” limit order strategy was not the correct use of limit orders. I hope this helps when designing the Order Management portion of your Trade Plan. As you can begin to see, the decisions you make on this point, can potentially make the difference in terms of being a losing or profitable trader.
Learn more on this, by watching the Trader Tip video. Click here, or watch below.
Proudly powered by: