When it comes to trading in the financial market, whether you're trading CFDs or buying the actual underlying asset, there are several orders you can use to execute your trade. These execution methods entirely depend on your trading strategy, and they can broadly be categorized as either market orders or pending orders. The primary difference between the two lies in whether your trade will be executed instantly or set to be executed when specified market conditions are met – at a later time, of course. What is a Market Order? A Market order is an order that is executed instantly. The latter will be executed against the Limit order closest to the market price. If it is a buy order, it will take the cheapest seller, and vice versa if it is a sell order. In comparison, a pending order instructs your broker or market intermediary to execute your specified trade in the future when the price of a particular asset reaches a specific level. These orders can then only be executed when the pre-set market conditions are met. Such orders are ideal for traders who do not have the time to continually monitor the market to find ideal entry and exit points. This means that the order is not executed instantly; it is necessary to wait until the price reaches the price of the order before it is executed. Pending orders are categorized into limit orders and stop orders. Types of Market Orders Basically, every type of trade that is executed usually converts into a market order. For example, when the conditions set for a pending order are met, that order immediately becomes a market order at the time of execution. However, setting this technicality aside, here are the common types of market orders. Take Profit Orders These are orders to your broker to close an open position when the price reaches a specified level above the entry-level for a buy order and lower than the entry price for a short position. Take profit orders can also be modified into limit orders. When you open a long position, it means that you expect the price to go up. As a risk management technique, you should set a take profit level. This is a specific level where you'd want your trade to be closed and for you to take the profits accumulated so far. Typically, the take profit level for a long trade is set above the buying price. Similarly, when you go short, you expect that the price will drop; this means that you set the profit level for a short trade below the selling price. Stop Loss Orders As the name suggests, these are designed to limit a trader's downside. They are meant to close out a position if the market trends in the opposite direction. For example, if you open a short position, you hope that the price will drop. Instead, if the currency pair rises, it means that you are accruing losses on your trading account. If these losses continue, your account could be wiped out. However, setting a stop loss order lets you instruct your broker to automatically close your position after the losses in your trading account reach a specific level. Here's how they are set. When you open a long position, you expect that the price will rise. But in the off-chance that the market doesn't go your way, it means that your trading account will accrue some losses. Setting a stop loss ensures that your trade will be closed at a specific level, preventing your account from taking further losses. For a long trade, the stop loss is set below the buying price. Similarly, when you short sell, you expect that the prices will drop. If the market adopts an uptrend, it means that your trading account will accrue losses. Setting a stop loss level ensures the losses you take are capped. For a short sale, the stop loss level is set above the selling price. Fill or Kill (FOK) Orders These orders are also called all or none orders. They require that the entire order amount be executed or canceled. That means the order is immediately executed completely or not at all. If an immediate full execution is not possible, the FOK order will be deleted without inclusion in the order book. Immediate-or-Cancel Orders An Immediate-or-Cancel Order (IOC Order) is an order that is executed immediately and completely or as far as possible. Unexecuted parts of an IOC order will be deleted without inclusion in the order book. When To Use Market Orders? Market orders help traders take advantage of the prevailing market news. They allow investors to have an order executed particularly quickly. When the order is placed, it is placed directly and without detours, if a trade is possible. These market orders have the highest priority, which means they are executed before all other order types, such as limit orders. Due to the fast execution and the high priority, there is no execution risk for the investor. As a rule, when placing an order, it can be assumed that the order is executed. The additions cheaply and optimally ensure that the broker executes the buy or sell order at the best possible conditions. Accordingly, the broker is instructed to execute the purchase at the lowest price and choose the highest bid price when selling. The advantages of market orders are particularly important when open positions are to be closed. In addition, a market order can be used as an alternative to the limit order to avoid a constant change in the limitations of limit orders. By placing a market order, the investor receives the certainty that it will be executed. Of course, this only applies under the general condition that a counterpart can be found, i.e., a buyer or seller. Risks of Using Market Orders Instant execution of trades implies that traders and investors must accept some risks that may arise in the market. Some of the most prominent risks include slippage, lack of liquidity, market closure, and unavailability of the market for security. Prone to Slippage Slippage is the difference between the price that you request a broker to execute your trade and the price that the trade is executed. Slippages occur when the price of a currency pair changes from when you place an order to when that order is executed. The main causes of slippage in trading are market volatility and latency in your broker's trade execution speed. Typically, only upon receipt of the execution confirmation will investors be informed of the price amount. Depending on the market movement, the price can be more positive or negative than previously expected. Unwanted price movements cannot be ruled out on the stock exchange, which is why this risk should be taken into account when issuing a market order. When the volume is abnormally high, during a dump or pump, for example, market orders may be executed at excessive prices. Indeed, if many people start selling simultaneously because of bad news, then many investors will sell at the market price to execute the action as quickly as possible. Unfortunately, if the number of sellers is too high, they will fetch the buy orders ever deeper into the order book. Therefore, there is a risk of selling at a very low price because the market would not have had time to consolidate during the panic. Unsuitable for Illiquid Assets, Markets, and Market Phases By now, you already know that some financial assets are less liquid than others; the liquidity also differs in different financial markets. That liquidity also changes in the different trading sessions throughout the day. Remember that the general rule in trading is that the market price reflects the equilibrium in demand and supply of an asset. This results in liquidity risks. Liquidity risk is the fact that you cannot sell your securities because of the non-existence or narrowness of the market for that security. This means that large market orders during these periods will either not be filled or severely skewer the asset's price, especially if the order is accompanied by significant market news. In trading, liquidity is the ability for an asset to be sold or bought quickly, without this transaction having any major influence on the prices charged on the market. Thus, a very "liquid" market means that it is easy, fast, and relatively inexpensive to carry out transactions there. Conversely, an illiquid - or even "illiquid" - market is a market in which there is a significant imbalance between supply (the sale of assets) and demand (the purchase of assets). In this case, prices go up because supply shrinks, or they go down if demand is sluggish. Finally, note that market liquidity problems can be transmitted from one exchange to another, with some assets being particularly related to each other. That is why most traders and investors use pending orders when executing large trades. Iceberg orders are especially popular in this regard. They are hidden orders aiming to divide a significantly large order size into smaller orders submitted to the market independently as limit orders. Such orders hide large order quantities to avoid distorting the market price. Market participants who want or have to trade particularly large quantities often rightly fear that they could move the price by displaying their large orders. That is why there is the possibility of so-called iceberg orders on some exchanges. Here, the client of a large order can specify that only a small part of the order is visible to others. The iceberg order is placed in the order book as a limit order. The total volume remains invisible. Others only see the peak at the respective limit, the so-called "peak." If a peak is executed, the next peak appears in the system, and so on. The Iceberg Order is not marked as such. Unavailability of Market for the Security Market orders also run the risk of not being executed. Take an instance where you want to buy a particular asset, but no one is willing to sell. In this case, your order won't be filled. Similarly, if you want to sell an asset and there are no bids in the market, your sell order won't be executed. However, this is often a very rare scenario. It is more likely to encounter the possibility of an illiquid rather than an entirely unavailable market. That means you have a higher chance of your order being partially filled unless you have opted for the fill or kill market order. Risk of Market Closure Market orders must be placed only when the market is in session. That means any orders placed outside the standard market times will not be executed. However, this may also safeguard traders and investors against adverse market movements during the post-trading sessions, preventing unfavorable trade execution. Difficult to Cancel the Order As we've mentioned, market orders are usually executed instantly. That means if you have placed a wrong order, it may be impossible to cancel the execution without incurring costs. More so, it is impossible to modify a market order once it has been executed. This is another area where pending orders triumph over market orders. With a pending order, you can set and review the predetermined conditions for the order to be executed. If you change your mind or trading strategies, you can easily cancel or modify the order before it is executed without incurring unnecessary costs. Conclusion With a market order, traders and investors often intend to have instant execution. This comes in handy, especially when one wants to take advantage of the current or emerging market conditions, such as the release of financial data. However, this instant execution isn't without its risks. Some of the risks associated with market orders include slippage, lack of liquidity, market closure, and unavailability of the market for security. This makes it important to understand factors that bring about the risks associated with market orders, such as market liquidity for various assets, scheduled news releases, and liquidity during different trading sessions.