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How Do Market Orders Work?

market orders intro

A market order is the most common type of order for executing trades in the Forex market where the trade is executed at the current bid and ask prices.

  • The Ask price is the lowest price the broker is willing to sell the currency pair or trading instrument, hence it becomes the traders buy price.
  • On the other hand, the Bid price is the highest price the broker is willing to buy the currency pair, hence the traders sell price.

Spread

The main cost of using market orders is the spread which is the difference between the Ask and Bid prices. Hence a trader should carefully check the spread since it may widen during very slow and high volatility market conditions. The spread in the above quote is (1.44439 - 1.44423 = 1.6 pips).

Market orders are not always filled at the exact price the trader made the order due to slippage. During fast price movements, the trade may be executed at a higher or lower price since the market has already moved.

As in the example below when a volatile move to the downside appeared; a sell market order that was placed at the price around 1.14442 would have been executed at a lower price which is negative slippage.

slippage

On the other hand; if a buy trade was placed at the same time, it was filled at an advantageous lower price which is positive slippage.

Most trading platforms will have buy and sell buttons to execute market orders as shown below;

mt4 market order

When to use a market order;

  • When opening a position and the trader is certain of the trade setup and satisfied with the current bid or ask prices.
  • Exiting a position manually is regarded as a market order as the trader is simply selling back an earlier opened position at the existing current market price.The position can either be closed at a profit or loss.

Conclusion;

Market orders are executed by traders certain they want to buy or sell a particular instrument at the current bid and ask price. However, they should be aware there are costs associated with market orders such as spread and slippage.

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