Carefully! Lots of text.
A market order allows you to instantly buy and sell financial assets at the best available price. Market orders use the prices of limit orders in the order book. That is, you will not know for sure what price you will get. In addition, there is always the possibility of slippage if the price differs from what was expected.
Limit orders differ from market orders in that you can place them in advance at a set price. The exchange will only execute your order at the set price or better. You can place market orders on Binance by going to the “Markets” tab and then “Spot”.
The main advantages of market orders are their simplicity, speed, efficiency and ability to be fully executed in most cases. The disadvantage of market orders is the risk of slippage and the fact that you must be present when the order is executed.
Introduction
Trading is much more complex than just buying or selling. When buying or selling a financial asset, such as cryptocurrency, stocks or forex, different types of orders are used. From FOK (fill or cancel) orders to limit stop orders, market orders are the easiest to use and therefore popular among beginners. Let's take a closer look at what market orders are and how they work.
Market Order Definition
A market order is an order to immediately buy or sell at the best available price. It requires liquidity to execute as it is executed based on limit orders already placed in the order book. If you want to immediately buy or sell an asset at the current market price, the best option is to create a market order. Let's say the price of BNB is likely to rise quickly and you would like to buy it as soon as possible. You agree to the market price to buy BNB immediately. In this case, you will place a market order on your chosen exchange.
How does a market order work?
Unlike limit orders, which are placed on the order book, market orders are executed instantly at the current market price. There are always two sides to trading - the maker and the taker. When you place a market order, you accept the price offered. For example, the exchange will match a market buy order with the lowest ask price in the order book. A market sell order, on the other hand, will match the highest bid price in the order book.
As we have already discussed, market orders require liquidity on the exchange in the order book to meet instantaneous demand. Because a market order removes liquidity from the exchange, you, as the market taker, pay a higher commission when placing it. Thanks to the Binance commission system, you can clearly see the difference between maker and taker commissions.
Example of a market order
It's much easier to demonstrate the relationship between a market maker and a taker using specific numbers, so let's look at an example. Let's imagine that you want to buy 1 BNB and the current market price is around 370 USD. Go to Binance and open the BNB/BUSD pair. To create a market buy order, enter 1 in the amount field and click “Buy BNB”.
After placing an order, the exchange reviews the order book. This register contains limit orders with a specific price to buy or sell an asset. In this case, your market order to buy 1 BNB at the market price (also known as the spot price) will be matched against the minimum sell limit order in the order book.
As you can see, the lowest sell limit order on the book is 1,286 BNB at $371.40 (BUSD). Your market buy order will buy 1 BNB from 1,286 BNB at a price of $371.40.
But let's say you want to buy 500 BNB at the current market price. The cheapest limit sell order available will not fill your entire market buy order. The remaining volume of your market order will be automatically matched with other limit sell orders, moving up the order book until it is fully filled. This process is called slippage, and is why the market taker pays higher commissions (or receives a lower price).
Market orders and limit orders
In short, limit orders are orders to buy or sell a certain amount of a financial asset at a set price or better. You can also choose whether the exchange is authorized to partially fill your limit order or whether it must be fully filled. In the latter case, if the exchange cannot fully fill your order, it will not be executed at all.
Market orders can only be executed by existing limit orders. Not everyone wants to accept the price available in the market when trading or investing, so a limit order is a good alternative. You can use limit orders to plan your trades in advance without having to be present for execution.
There are also differences in the trading operations and tasks for which market orders and limit orders are intended. Limit orders are best used in the following cases:
1. When the asset price has high volatility. Placing a market order in a highly volatile market may result in unexpected results. From the moment an order is created to the moment it is executed, the price can change significantly, which will affect the profits and losses of arbitrage traders. A limit order guarantees that you will receive the desired or better price.
2. When the asset has low liquidity. In this case, using a market order may cause slippage. This occurs when there are few market makers in the order book and your order cannot be filled at the current market price. As a result, you will receive a less favorable purchase or sale price than you expected. On the other hand, a limit order will not be fully filled if slippage causes the price to go beyond your limit.
3. If you already have a strategy. Limit orders do not require your participation during execution and can be placed in advance. This way your strategy will work even without active trading. You cannot do this with market orders.
When to use a market order?
Market orders are suitable for you if order execution is your priority, regardless of the final price. Market orders should only be used if you are prepared for slippage and are willing to pay a higher price. In other words, market orders are useful if speed is important to you.
It may be that you have a limit stop order, but you need to buy or sell the asset as soon as possible. In this case, market orders can come in handy.
If you are experienced with cryptocurrency and want to buy several altcoins with your Bitcoin, it is better to avoid using a market order, as you risk paying more than you need to. In this case, it is better to use a limit order.
When you trade highly liquid assets with low bid-ask spreads, a market order will suggest a close or expected price. Assets with wide spreads have a much higher chance of slippage.
How to Place a Market Order on Binance
Let's say you want to create a market order to buy 2 BNB. After logging into your Binance account, go to the exchange overview. Select your desired BNB market (eg BNB/BUSD), find the Spot tab and select Market. Then enter the purchase amount of 2 BNB and click “Buy BNB”.
A confirmation message will then appear on the screen and your market order will be executed.
Benefits of using a limit stop order
Depending on the situation, using a market order has three main advantages:
1. Market orders are easy to use. If you want to trade highly liquid coins like Bitcoin or ETH with a large market cap, then a market order is a fairly safe option.
2. You can buy or sell any amount of an asset. Whether you need to close all your positions or open one as soon as possible, a market order will almost always guarantee this.
3. You can trade immediately. Sometimes there may not be enough time to complete a transaction, such as shortly before closing. A market order is almost always the fastest way to execute a trade, at least faster than a limit order.
Disadvantages of Using a Market Order
Despite the speed advantage of a market order, your control over it is limited. Its main disadvantages:
1. You may encounter high slippage when dealing with small volume assets. There is a risk of paying more than you planned or getting much less profit. Without enough volume in the order book, you will move up or down on the orders placed.
2. You cannot plan your trades in advance. You won't always be there to control the trade. If the market moves against your position while you are asleep or unavailable, you will not be able to place a market order. In this situation, you will have to use a limit order or a limit stop order.
More information about using limit orders can be found in the section What is a limit order.
To learn more about limit stop orders, see the article What is a limit stop order?
Summary
A market order is the easiest way to buy and sell financial assets. This is the best option for quickly entering or exiting the market. However, you will have much less control over it than we do with other types of orders. It is best to decide whether to use a market order or any other order based on your specific situation.
