Market basics

Orders: market, limit and stop, and which of them is a promise

There are only two things an order can guarantee: the price, or the fill. No order type on any exchange guarantees both, and every mistake in this lesson comes from someone assuming theirs did.

About 11 minutes to read. Free, no account.

The one trade-off every order type is made of

A market order says: fill me now, at whatever the book offers. You are certain to trade and uncertain what you will pay. It is a request for immediacy, and the price is the variable.

A limit order says: I will trade at this price or better, and I will wait. You are certain what you would pay and uncertain whether you trade at all. It is an offer that sits in the book until somebody takes it or you cancel it.

That is the entire design space. Everything else - stops, stop-limits, trailing orders, time-in-force flags - is a rule about when one of those two gets sent.

A market order, priced honestly

A market order walks the book from the top until it is filled. So its price is an average of however many levels it had to consume. Here is a buy for 50 coins against a book whose quoted ask is 20.00:

A 50-coin market buy

level 1    10 coins at 20.00   =   200.00
level 2    20 coins at 20.10   =   402.00
level 3    20 coins at 20.30   =   406.00
                                 --------
total      50 coins                1008.00

average fill   1008.00 / 50   =  20.16
quoted ask                       20.00
slippage       0.16 / 20.00    =  0.80%

You asked for the market price and the market gave you one: 20.16. The 20.00 you clicked on was the price of the first 10 coins. Nothing here is a malfunction, and nothing here is visible on a chart afterwards - the chart will show trades at 20.00, 20.10 and 20.30, and your average is not one of them.

Slippage gets worse exactly when you least want it to. In a fast move, resting orders are cancelled and consumed faster than they are replaced, so the book you are about to hit is thinner than the one you looked at.

A limit order, and its two completely different failures

A buy limit at 19.90 when the ask is 20.00 just sits there. If price never trades down to you, you never trade - and you were right about direction and got nothing for it. That is the obvious failure and the cheap one.

The second failure is the one that costs money. A limit order fills because the market came to your price, which means your price was on the way to somewhere. Your buy at 19.90 fills in a market heading to 19.00. You got the price you asked for, in the one circumstance where getting it was not good news.

A limit order can fill partially. A fill for 3 of your 10 coins is a real position of 3 coins, with a real stop requirement, and the remaining 7 are still working unless you cancel them.
A limit order can fill better than its price - a buy limit at 19.90 reached by a market selling through to 19.70 fills at 19.90 or better, because the exchange matches at the resting order’s price. "Or better" is in the definition.
A limit order you forgot about is still an order. Cancelling what you no longer want is part of placing it.

A stop is a trigger, not a price

This is the single most misunderstood mechanism in retail trading. A stop order is not resting in the book at your price. It is an instruction held by the exchange that says: when the market reaches this level, send an order. Which order it sends is the whole question.

Stop-market. When triggered it sends a market order. You are certain to be out, and the price is whatever the book gives you at that moment.
Stop-limit. When triggered it places a limit order at a price you chose. You control the price and accept that in a fast move the market can go straight through your limit and leave you in the position.

So a stop-market protects your exit and not your price; a stop-limit protects your price and not your exit. Here is a stop-market being triggered in a gap:

A stop-market filled below its trigger

stop trigger              20.00
next available bid        19.50   (the 20.00 bids were consumed)
fill                      19.50

worse than the trigger by  0.50
as a percent               0.50 / 20.00  =  2.5%

Your stop was at 20.00 and your loss was taken at 19.50. The exchange did exactly what you asked. A stop defines where you stop deciding, not where you stop losing.

The flags that change what an order means

A few modifiers appear on almost every exchange, and each one exists to prevent a specific accident.

Good-til-cancelled (GTC) - rests until filled or cancelled. The default, and the reason forgotten orders exist.
Immediate-or-cancel (IOC) - fills whatever it can right now, cancels the rest. A limit order with no patience.
Fill-or-kill (FOK) - fills completely right now or not at all. No partial fill.
Post-only - cancels itself if it would execute immediately. It guarantees you rest in the book rather than taking, which is how you make sure you are charged the maker fee.
Reduce-only - may only shrink an existing position, never open or flip one. This is the flag that stops a mistyped exit from quietly opening a position in the opposite direction.

What no order type can do

None of them guarantees a price and a fill together. Choosing an order type is choosing which of the two you are willing to lose.
None of them creates liquidity. If there is nothing to trade against, no flag conjures a counterparty.
None of them survives being unmonitored forever. Orders can be cancelled by the exchange - on a market halt, a settlement, a delisting or a connectivity event - and an order you believe is protecting you may not exist.
None of them makes a decision for you. A stop is only as good as the price you chose and whether you leave it alone. Moving a stop to avoid a loss is the reason stops have a reputation for not working.

Order mechanics are the plumbing of a trade, and plumbing is where the unglamorous losses live. See the risk disclaimer - nothing here is a recommendation about what to place.

The terms, defined

Market order: An instruction to trade immediately at whatever prices the book offers. Certain fill, uncertain price.
Limit order: An offer to trade at a named price or better, resting in the book until taken or cancelled. Certain price, uncertain fill.
Maker / taker: An order that rests and waits makes liquidity; one that consumes a resting order takes it. Exchanges price the two differently.
Stop order: A held instruction that sends an order when a trigger price is reached. The trigger is not the fill.
Stop-limit: A stop whose triggered order is a limit order. It protects your price and can leave you in the position.
Partial fill: An order filled for less than its full quantity. The filled part is a real position; the rest is still working.
Post-only: A flag that cancels an order rather than letting it execute immediately, so it can only ever be a maker.
Reduce-only: A flag that permits an order to shrink a position but never to open or reverse one.

What this means in practice

Say which of price and fill you are giving up before you choose the order type. That is the only real decision in the dialog box.
Price a market order against the book before sending it, not against the quote.
Treat a limit fill as information: the market came to your price, and it may not have stopped there.
Check what price triggers your stops - last, mark, bid or ask - on the exchange you actually use.
Expect a stop-market to fill worse than its trigger, and size the consequence of that in advance rather than being surprised by it.
Use reduce-only on exits, and cancel orders you no longer want the moment you no longer want them.

Nothing in this lesson is financial advice or an instruction to trade. See the risk disclaimer. We never recommend a leverage setting - that decision is yours.