The New Sell and Sell Short: How to Take Profits, Cut Losses, and Benefit from Price Declines, Expanded Second Edition

MARKET OR LIMIT ORDERS

All orders can be divided into two broad groups—market and limit orders. A market order is filled at what brokers call the best price—but what is in fact any price and often the worst price. An alternative to a market order is a limit order. It demands an execution at a specific price—or no execution at all. A limit order helps you avoid slippage.

A market order guarantees you an execution but not the price. A limit order guarantees you the price but not the execution. You must choose because you cannot have both in the same trade. You have to decide what is more important to you—an execution or an avoidance of slippage? You may answer this question differently at different times.

Suppose you’ve bought 1,000 shares of a $19 stock, and your research indicates that if it declines to $17.80, the uptrend will be over. You call your broker or log onto his website and place a stop order to sell 1,000 shares at $17.80, good until cancelled. Normally, a stop order is placed below the market as an MIT order—“market if touched.” If you put your stop at $17.80, it will become a market order to sell 1,000 shares the moment that stock trades at $17.80. Your position is now protected.

A market order is a slippery thing. In a quiet market, you may get filled at $17.80. Occasionally, you may get very lucky, and if prices bounce after touching $17.80, you may get filled at $17.81 or $17.82. What is much more likely to happen, however, is that during a sharp downdraft ...