Market orders vs. Limit orders. Is there an easy answer?

I don't think so. Clearly market orders expose you to a poor entry price where limit orders define your price so you know how much you will pay. If you exclusively use limit orders and feel that you can always wait for the price to come down to your limit, you may feel you are one of the smart guys. Well, you are as long as the price comes back to you.

As we all know, if you are looking to get in on a screamer, the price movement in the early stages of advance can be leave a whole bunch of limit orders in the dust. Yes, your limit order kept you from over paying but saving $.20 on the entry price pales in relation to the $2.00 advance you missed out on.

So where are we? If the price has run up in a basically a range bound market you can look for a retracement and buy closer to support. If the price is in a general advance, you can sometimes observe an extreme move; you may then have the opportunity to buy on a retracement with a limit order. If you really want to own something you may consider a market order and just live with the results.

For what we do, market orders are really not very good ideas. We tend to place our "potential buys" at levels that the stock hasn't already reached. For instance a common statement from us would be something like ""XYZ is at $4.60, we'd take a shot at it above $5.00". With that type of "level" to look forward to, more times than not you can just put in a limit order and get filed. We aren't chasing a high flyer that's roaring, we are usually just picking up on a stock that's crossed a resistance level.

Now it's true that sometimes so many eyes are focused on a breakout that the stock starts to run away, but we can usually be ahead of it. In the instance above, we might put a limit order in on XYZ at say $5.04 or $5.06. By placing it even higher than the actual resistance level, more times than not the stock is rising into our order, we aren't "chasing" it.

In pure daytrading, we've missed so many great trades trying to be a market maker, and swap sides, and buy on the bid that the stock roared higher without us. At times like that a market order is often your only shot, despite the fact you might get the lousiest fill on the planet. We just wanted to alert you to the difference.

Larry Potter is a recognized authority on the subject of trading and has been publishing his newsletter, Stocks2Watch®, since 1998. Each evening, his newsletter contains picks for the next day and always includes a free trading tip.
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