Market orders allow you to trade a token for the going price, while limit orders allow you to name your price.
When you’re ready to buy or sell a token on a decentralized exchange also called DEX, you have two main ways to determine the price you’ll trade at: the market order and the limit order. With market orders, you trade the token for whatever the going price is. With limit orders, you can name a price, and if the token hits it the trade is usually executed.
That’s the most fundamental difference between a market order and a limit order, but each type can be more appropriate for a given trading situation. Here’s what you need to consider.
Market orders get you in or out fast
The biggest advantage of a market order is that your broker can execute it quickly, because you’re taking the best price available at that moment. If you’re buying a token, a market order will execute at whatever price the seller is asking. If you’re selling, a market order will execute at whatever the buyer is bidding.
The biggest drawback of the market order is that you can’t specify the price of the trade. Many times that doesn’t matter, however. For large enterprises that are highly liquid (trade in high volumes), the difference between buyers’ bid price and sellers’ ask price — called the bid-ask spread — is cents on the dollar. Unless you’re buying huge numbers of tokens, that difference doesn’t matter.
However, if the price moves quickly, you could end up trading at a vastly different price from when you entered the order. That’s rare but possible. A more likely scenario: You enter a market order after the market closes and then the enterprice announces news that affects its token price. If you don’t cancel the order before the exchange opens the next day, you may end up trading at a much different price than you had intended.
Another potential drawback occurs with illiquid tokens, those trading on low volume. When you enter a market order, you might spike or sink the token price because there are not enough buyers or sellers at that moment to cover the order. You’ll end up with a much different price than just moments before as your order influences the market.
Go with a market order when:
- You want a quick execution at any cost
- You’re trading a highly liquid token with a narrow bid-ask spread (typically cents)
- You’re trading only a few tokens (for example, less than 1000)
Limit orders might get you the price you want
The biggest advantage of the limit order is that you get to name your price, and if the token reaches that price, the order will probably be filled. Typically, you can set limit orders to execute up to three months after you enter them, meaning you don’t have to watch compulsively to get your price.
On some (illiquid) tokens, the bid-ask spread can easily cover trading costs. For example, if the spread is 10 cents and you’re buying 100 shares, a limit order at the lower bid price would save you $10, enough to cover the commission.
The biggest drawback: You’re not guaranteed to trade the token. If the token never reaches the limit price, the trade won’t execute. Even if the token hits your limit, there may not be enough demand or supply to fill the order. That’s more likely for small, illiquid tokens.
Another drawback, especially with an order that can execute up to three months in the future, is that the token may move dramatically. Your trade may be filled at a price much different from what you could have otherwise gotten.
Imagine Ethereum announces a potentially huge novelty and its Ether (ETH) token spikes from $200 to $270, while you have a limit order to sell at $202 using a USD equivalent stablecoin like Tether as settlement. You might end up selling for $202 when you could have received more. The reverse can happen with a limit order to buy when bad news emerges. You may end up buying at a much higher price than you otherwise could have or now think the tokens’s worth.
Go with a limit order when:
- You want to specify your price, sometimes much different from where the token is
- You want to trade a token that’s illiquid or the bid-ask spread is large (usually more than 5 cents)
- You’re trading a high number of tokens (for example, more than 500)
Save money on commissions
Limit orders can help you save money on commissions, especially on illiquid tokens that bounce around the bid and ask prices. But you’ll also save money by taking a buy-and-hold mentality to your investments. Because you avoid selling out of the market, you’ll incur fewer commissions and you’ll avoid capital-gains taxes, which could easily dwarf trading costs. Plus, you’ll want to stay invested to let the compound growth work its magic.
