When placing orders to trade stocks you can place a couple different types of orders but the one I want to talk about now is called market orders. When you place a market order you are saying that you will buy or sell at whatever price the market price is when you submit your order.
Looking at the above order window you will see that I have an order ready to buy 1,500 shares of $NFLX at the current market price, which is the ask (since I’m buying) at $128.82. If I were placing market order to sell then I would be getting filled at the bid of $128.79.
Market orders are great for getting in and out of trades quickly, however, they have a major downside and that is slippage. In this example I am using $NFLX which isn’t the most liquid stock in the market with the bid and ask sometimes only having a few hundred shares.
What happens is when you place a market order to buy for more than what is available at the current ask price you will then move on to the next price level. So in this case we would buy up all the shares at $128.82 and then we would go on to buy whatever is at $128.83 and so on. This can cause real bad slippage and give you a high average price which will reduce your profit potential.
This is more of a problem when you are trading with larger size and it also depends on what you are trading. If we were putting this same order out on the SPYs we probably wouldn’t have any slippage because it is so liquid with a ton of buyers and sellers.
Warrior Trading Pro Tip
When placing market orders it is important to pay attention to the the spread and the size at each price level. You’re main concern when getting into a trade is getting the best price to maximize profits but that can be hard sometimes with market orders.
That is why I try to save market orders for when trades go bad and I have to get out ASAP. Otherwise, it’s best to look at placing marketable limit orders which I have preset to my hotkeys with a 3 cent cushion.
If your broker passes through ECN fees and credits you’ll only want to use market orders when you absolutely have to because it is considered an order that takes liquidity out of the market and will result in a fee.
If you place a limit order to buy at the bid or lower and another trader sells down to your price, you are providing liquidity and will receive a small credit to your account based on how many shares were executed.
It’s not a huge amount of money but it can add up to a lot over the long run. Not all brokers do this, but if yours does, then you should really look into placing orders that provide liquidity to help reduce those fees.