WhitmanTrading

Order Types Explained: Market, Limit, Stop

An order type is the instruction that tells a broker how to trade, not whether to. A market order takes whatever price is available and always fills; a limit order names a price and fills only if the market reaches it, which means it can be missed entirely.

How it works

A candlestick chart of the site's shared price history, with market-order fills marked in green. The headline on the chart reads: A market order fills every time, at whatever is there.
A market order fills every time, at whatever is there. Illustrative chart - not real market data.

An order type is an instruction about how to trade, never about whether to. The decision is yours. The order type only decides what the broker is permitted to accept on your behalf.

A market order says: fill me now, at whatever the best available price is. It is a certainty about execution and an open question about price. Every one of the 40 attempts measured for this page filled, because a market order that reaches a functioning market always does.

A candlestick chart of the site's shared price history, with filled limit orders marked in green and missed ones in red. The headline on the chart reads: A limit order one bar below missed 38% of these attempts.
A limit order one bar below missed 38% of these attempts. Illustrative chart - not real market data.

A limit order says: fill me at this price or better, and not otherwise. It is a certainty about price and an open question about execution. If the market never comes to your number, nothing happens and you own nothing.

That trade-off is the whole subject, and it is measurable rather than a matter of taste.

The fill-rate trade-off, measured

The measurement below places a buy limit below the close, good for five bars, at four distances expressed in median bar ranges, across 40 entries on the site’s shared price history.

Limit placed below the market Filled Missed Of the misses, price was higher 5 bars later
0.25 of a bar 37 (92%) 3 (8%) 3 of 3
0.50 of a bar 34 (85%) 6 (15%) 6 of 6
1.00 of a bar 25 (62%) 15 (38%) 11 of 15
1.50 of a bar 11 (28%) 29 (72%) 18 of 29
A strongly rising stretch of the long price series, with filled limit orders marked in green and missed ones in red. The headline on the chart reads: Further below the market is a better price and a worse fill rate.
Further below the market is a better price and a worse fill rate. Illustrative chart - not real market data.

Read the last column carefully, because it is the part nobody mentions. At the quarter-bar distance, every single missed order was one where price then went up. The trades a patient limit order misses are disproportionately the ones that ran without you.

A stop order is the third type and it is the one most often misunderstood. A stop is a trigger. When price touches it, a market order is sent. The stop price is where the order wakes up, not where it fills.

A candlestick chart of the site's shared price history, with the entry price and the level at which a stop would trigger drawn as horizontal lines. The headline on the chart reads: A stop order becomes a market order the moment it triggers.
A stop order becomes a market order the moment it triggers. Illustrative chart - not real market data.

In practice: stops, gaps and duration

A candlestick series containing several opening gaps, with the largest opening gap marked. The headline on the chart reads: Which is why a stop is a trigger price, not a fill price.
Which is why a stop is a trigger price, not a fill price. Illustrative chart - not real market data.

On the gaps above, a stop sitting inside the gap does not fill inside it. The market opens past the trigger, the stop converts to a market order, and it is filled at the open. The distance between those two numbers is the cost of the gap, and no order type removes it.

A declining stretch of the long price series, with the largest opening gap marked. The headline on the chart reads: A stop limit will not chase, which is the risk and the point.
A stop limit will not chase, which is the risk and the point. Illustrative chart - not real market data.

A stop-limit is the compromise and it cuts both ways. It triggers like a stop and then behaves like a limit, so it refuses a bad fill — and on a genuine gap it refuses every fill, leaving you in a position you had decided to exit.

A 72-bar candlestick section of the shared price history. The headline on the chart reads: Every order you send joins a queue at its price.
Every order you send joins a queue at its price. Illustrative chart - not real market data.

Underneath all of this is one queue. A limit order rests in the order book and waits its turn. A market order removes resting orders. That is the whole mechanism, and every order type is a different way of interacting with it.

A long-horizon candlestick view of the same price series. The headline on the chart reads: And good-till-cancelled means the order outlives your reason.
And good-till-cancelled means the order outlives your reason. Illustrative chart - not real market data.

Duration is the setting people forget. A day order expires at the close; a good-till-cancelled order does not. An order left resting for weeks will eventually fill on a day when the reason you placed it no longer applies.

Two more duration settings exist and both are narrow tools. Fill-or-kill demands the entire quantity immediately or cancels; immediate-or-cancel takes whatever is available right now and cancels the remainder. Both matter only when your size is large enough that partial fills are a real possibility, which for most retail orders they are not.

A trailing stop is a stop whose trigger moves. You set a distance rather than a price, and the trigger follows the position’s favourable direction while never moving back. It converts a fixed exit into a ratchet, and it is still a market order once it fires — so everything said about gaps applies to it unchanged.

Market-on-close and limit-on-close route into the closing auction rather than the continuous session. That auction is a single price struck once, with far more size behind it than an ordinary moment in the day, which is why large orders often prefer it.

When it fails

A sideways, range-bound candlestick series.
In a range the limit fills; in a trend it watches. Illustrative chart - not real market data.

A limit order’s fill rate is not a property of the order — it is a property of the market. In the range above, price returns constantly and almost everything fills. In a trend it does not, which is exactly when you most wanted to be on.

A candlestick chart of the site's shared price history, annotated with the round-trip cost. The headline on the chart reads: The spread is paid either way: 2% of a typical bar.
The spread is paid either way: 2% of a typical bar. Illustrative chart - not real market data.

And the spread is charged regardless. Choosing a limit order does not avoid it; it just changes which side of it you are standing on. A market order crosses it and pays immediately. A resting limit order is on the receiving side of the next person who crosses.

The third failure is a limit order that fills for the wrong reason. A buy limit resting well below the market fills when something has gone wrong badly enough to reach it. The order did exactly what it was told, and the reason it filled is a reason you might not have chosen to buy.

The original data

23 of the 24,971 videos measured for this site cover order types, at a median of 91,378 views — the third-highest median in the market-mechanics group. The fill-rate table above was computed for this page rather than quoted: 40 entries, four distances, five-bar patience, on the shared history.

A candlestick chart of the site's shared price history, cut short at the decision bar.
You want in. Market now, or limit and risk the miss? Illustrative chart - not real market data.

The honest summary of that table is that there is no free choice in it. Every step toward a better price costs fill rate, and the orders you lose are weighted toward the moves you wanted.

The order book is the queue every one of these joins. The bid-ask spread is what a market order pays to cross. And a stop-loss is an order type with a job attached, which is why its placement is a separate question from its mechanics.

What I actually do

I use limit orders for entries and market orders for exits, and that asymmetry is deliberate. Missing an entry costs me a trade I might not have wanted; missing an exit costs me the one thing I was certain about, which was that I wanted out.

— Michael Whitman

This page is educational, not financial advice. Test every idea on your own charts before risking money.