Warrior Trading Blog

Marketable Limit Orders Explained for Beginners

Marketable Limit Orders

 

The world of day trading is fast-paced and intense.

Profits can turn to losses in a matter of seconds if you hesitate or enter your order incorrectly, especially if you’re trading in volatile sessions.

Precision is critical when day trading if you want to maximize your profits and minimize your losses.

In order to be precise with your trades, you not only need to understand technical signals on a chart, but also the types of orders you can place when executing a trade.

Using the wrong order type could leave your trade sitting unexecuted or getting filled at an unacceptable price.

If precision is the goal, you need to utilize more than just basic market orders. Here are a few of the basics to understand, including how to use what’s called a marketable limit order. 

Understanding Order Types 

Using different order types will ensure that you get as close as possible to your ideal price on your trades. Some order types can even be used in conjunction to limit losses.

These are the five basic order types your broker will present you with. 

  • Market Orders – A market order is an order that will immediately be executed at the best available price. When you place a market order, you’re looking to get your order filled immediately and aren’t overly concerned with slippage in the purchase price.

Brokers are required to fill orders at the National Best Bod and Offer (NBBO) price per SEC regulations, meaning they have to supply the best available price. However, best available doesn’t always mean the price you want. Market orders are best used for highly liquid stocks like large caps.

  • Limit Orders – A limit order doesn’t execute right away, but will trigger when a certain price is reached. For example, if you wanted to buy Stock A at $10.65 and it’s currently trading at $10.85, a limit order can be set to automatically execute a buy when the price dips to $10.65.

Limit orders are more precise than market orders and give traders more control over their capital in volatile or thinly-traded stocks.

  • Stop Loss/Take Profit Orders – Stop Loss and Take Profit orders are automatic selling directives that execute when a stock reaches a certain price either on the upside or the downside.

For example, if you bought Stock A at $10.65, you can set a Stop Loss at $10 and a Take Profit at $12. In this scenario, your sell order will execute if the shares rise to $12 or fall to $10. Like limit orders, stop losses and take profit orders give traders more control and allow losses to be minimized.

Additionally, you can use a trailing stop to set a level at which you’d like to sell your shares, but the level will follow the stock up if the share price rises. If you set a trailing stop at $10 for your $10.65 shares, then the stop loss order will continue to ‘trail’ the stock price by $0.65 if it rises.

If the stock declines by more than $0.65 at any point, the sell order will be triggered.

  • One Triggers the Other (OTO) – These are complex orders that allow traders to string multiple orders together in one command. OTO orders are commonly used to hedge positions or to accumulate stock slowly through multiple orders.

What is a Marketable Limit Order? 

A marketable limit order is a limit order that is set either above the ask price on the buying side or below the bid price on the selling side.

What’s the purpose of using a limit order that will execute immediately like a market order?

Because in day trading, we often have trades we’d like to enter right away but are concerned about price slippage when using market orders.

Slippage is when your market order gets executed at a worse price than you were anticipating because the stock was either too volatile or too thinly-traded.

If you enter a market order for Stock A at $10.65 on a volatile day of trading, you may not get your order filled as quickly and could wind up with a price like $10.80. But if you set a limit order at $10.65, you may not get you trade filled at all.

Here’s where a marketable limit order comes in.

By setting the limit buy order price above the ask, you can account for a little bit of slippage but you won’t get filled at a price beyond your limit.

If you make your limit order marketable by setting it at $10.70 when Stock A is trading at $10.65, you may get filled at $10.68 or whatever the NBBO price is. But the order won’t execute if the price jumps to $10.71 or higher while searching for a fill.

This works for selling too – if you set your limit sell price at $12.00 while the stock trades at $12.05, you’ll get filled at $12.00 or better, but not if the stock slips to $11.99. 

Utilizing Marketable Limit Orders in Your Trading Regimen 

A marketable limit order might sound redundant, but it’s an important tool in the day trader’s toolbox.

Low float stocks are often lightly-traded, which means slippage is a major factor when executing market orders.

Of course, canceling and re-entered limit orders can be tedious as well and you might miss out on gains trying to pinpoint the exact entry price. 

By using a marketable limit order, you can get faster fills on volatile stocks without sacrificing too much to slippage or worrying about getting a bad fill on thinly-traded shares.

Precision and quickness are two skills all day traders need to be successful. With marketable limit orders, you get both of these – a faster fill and more control over the execution price.

However, this isn’t a cheat code to trading and marketable limit orders can sometimes leave traders with partial fills.

Always consider the pros and cons of your trade ideas before attempting to execute them, even when using precise order types like these.

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