ETF Trading Tactics
Market versus Limit Orders
Market and limit orders are the two basic order types—understanding the difference between the two is important for successful trading.
A market order is an order to immediately buy or sell an ETF at the best available price. There is no price control, and while it typically delivers instant execution, the order may be filled at a price that is far from the current bid/offer, particularly during times of market volatility.
A limit order is an order to buy or sell an ETF with a restriction on the maximum or minimum price to be paid or received. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. While limit orders do not guarantee full execution, they offer investors some protection against unforeseen market moves or a momentary lack of deep bids and offers. Using limit orders in a reasonable range of fair value can help investors trade successfully with more control, understanding that the full order may not be executed.
A stop-loss order is an order to buy or sell an ETF at the market price once it has traded at, or through, a specified or ‘stop’ price, triggering a market order. While this can be a good way to passively manage positions, it exposes investors to the risks of market orders. Stop-loss orders may be triggered during times of higher volatility, which are usually not good times to use market orders.
A stop-loss limit order is an order to buy or sell an ETF at the market price once the ETF has traded at, or through, a ‘stop’ price, with a limit price attached to it. The objective is to activate a limit order at a specified price. Using limits when trading gives investors price control of their orders, but stop-loss limit orders do not ensure execution.