market/limit orders...

I was just reading the first pages of “trading for a living” by Alexander Elder and suddenly I read: “...To reduce slippage...Use limite orders, buy or sell at a specified price...”. Then I remenbered that recent thread about people complaining about FXCM's “at best” order (a market order), and merlin saying that proffesionals use only limit orders. Here is my question: (hope You are reading this Merlin, I was going to post this as a reply for the market orders complaint's thread, but since this is a question about limit orders I though it should be posted here as a new thread).


Lets say I have a strategy where I use daily charts. Each day at 00:00 GMT (just an example) I look at the charts and if I see a good setup, I place a trade which usually will last for a few days. With this kind of strategy, how should I enter the market? I mean, if I see a good setup I want to enter the market right now, but I keep reading books and and I keep hearing “don't use market orders!!!”. I'm thinking that if I can't (or shouldn't) use market orders then I would have to place a limit order closer as possible to the current price...this will take a few pips away from me on every trade, although slippage may take even more pips....? Note that I'm not talking about intraday and/or news trading.


So, hope to see some replies.


Thanks!!!

I have an idea. Just use the market order, I think the slippage will be minimum as long as you are not trading during volatile times. Another way to do is by signing up with a clearinghouse that has fixed spread at all times. I use a clearinghouse that has fixed spread at all times, so you know you're not getting a slippage even with market order. It will just say "price moved" so you just won't get to enter the market. And it says that whether the price has gone either against or for you, so I know it's fair.

im only a newbie my self so take my comments with a pinch of salt.
i think ine reason that people say that the "pros" use limit order is not to short slippage but for the reason of the trade it self.
what i mean is a good setup means that you you think the market is going to go a particular way with a high degree of certainty.
now you place your order a few points below/above that point in the direction you think market is going to move just as a confirmation to your analysis that market is moving that way.
this is why people place limit orders i think.

Market orders are designed to guarantee execution, but not price.

Limit orders are designed to guaratnee price, but not execution.

A buy limit will be placed underneath the current market price. Your order will be filled at or below your limit price. If your order cannot be filled at or below your limit price, you order simply will not be filled. For sell limit orders, you place the limit above current market price....etc. etc.

The problem with a market order, and why professionals don't like them, is that you have little to no control over your entry price. However, in return for better control over entry price, you give up the assurance that your order will be filled. There's no such thing as a free lunch!

The problem with a limit order is if the market takes off in one direction and never looks back you will not get filled. For instance, let's say the market is trading at 50 and you want to get long so you put a buy limit order in for 48. If the market climbs to 51, then 55, then 60, then 80 you will be sitting there with a buy limit at 50 and nothing more. A market order would have gotten you in at (around) 50.

Slippage is a concern, especially in fast-moving markets. Limits offer increased control over this slippage where market orders expose you to whatever the market does.

-=DAVE=-

Ok, so I guess this is not an (extremely important) issue for a swing trader who enters the market between 22:00/02:00 GMT when there's not much action going on. I wouldn't care a few pips slippage if I'm going for a 150 pips TP for example...but I would certainly hate to see my limit order not triggered and miss the big movement.

Anyway, I understand that some times limit orders are necessary in order to confirm a move (like Gholimoli said) so I think I'll use both of them...

Ricardo -

Great observation. I can think of many situations that would not require a limit order. The limit order has a specific function, so does a stop and a stop-limit. They're all tactical tools that a trader should be versed in and know when it is appropriate to use each of them.

I use the simple table below to remember what types of orders do what:

SL | BS
-------
MARKET
-------
BL | SS


Key:
SL = Sell Limit
BS = Buy Stop
MARKET = self-explanatory
BL = Buy Limit
SS = Sell Stop

I remember this by thinking of the orders entered above the market as "SLoBS" and those entered below the market as "BLeSSed". It's kinda corny, I know, but serves a purpose of Keep It Simple Stupid (KISS).

When the market is really moving and you need to make quality decisions very quickly, you don't want to be letting loose with a Buy Stop when you really wanted to enter a Buy Limit but got confused in the heat of the moment. Most trading platforms that I've used won't let you enter non-sensical trades (i.e. a Sell Limit or Buy Stop 100 pips below the current market price) but entering erroneous trades is a sure time-waster and can cost you pips. I don't want my concentration broken if time is critical.

-=DAVE=-