With release v1.17 VEMA has introduced the ability to select which order type you'd like to use for your Take Profits - Market or Limit.

Both limit orders and market orders have their different uses at different times.

This guide is aimed at educating you on the strengths and weaknesses of each, as well as teaching you how they work on the exchanges.

If you find it all a little confusing and hard to take in, the good news is, with VEMA Trader, you don't need to know how they work, how to place them on the exchange or how to read the orderbook, you just need to know where you want to put them.

In this article I'm going to explain what market and limit orders are, but first I'll kick off with a quick summary of these, then I'll get into the details below.

 

Limit Orders	Market Orders
Maker* Orders	Taker Orders
Guaranteed Price	Guaranteed* Fill
Risk of Partial or No Fills	Risk of Slippage
Lower Fees, sometimes Rebates	Higher Fees
BitMEX + 0.01% Rebate OKX - 0.02% Fee	OKX - 0.05% Fee BitMEX -0.075% Fee

 

 

TL:DR

Limit Orders

Specify the amount you want to buy, at a specific price. Guarantees that price, but does not guarantee your order will fill. Fees are lower and can some exchanges actually offer a rebate instead.

Usually operates as a Maker order as they are "Making" (providing liquidity for) the books.

Market Orders

Specify the amount you want to buy at whatever the market is selling for. Guarantees* a fill, but runs the risk of slippage. Fees are higher.

Operate as a Taker orders as they are "Taking" (liquidity) from the books.

 

Notes

Guarantees*

I put the asterisks as there are rare times markets won't fill the entire order size. 

Some exchanges protect you from self liquidation due to large slippage on entry by only partially filling orders in the event this would occur.

Also if a position size was so large, or an order book so illiquid, that the order cleared the entire book it would be possible to only have a partial fill on a market order.

Fee Rates

Fee rates in this article are exchange default rates and are subject to change, they may also differ if you have access to discounted fee rates through methods such as sign up bonuses or holding / staking exchange tokens. Even different symbols on the same exchange can at times have different fee rates.

Direction

Both Limits and Markets can be buys or sells.

I'm going to write this article mainly referencing buys to avoid a lot of "Up if a buy, down if a short" type sentences, but they work exactly the same for buys and sells, the direction just being reversed.

Limit Orders

A Limit order, often also known as a "Maker" order, is an order that will buy a given amount of the asset only at a specific price or better.

For some reason I always think of markets like a big old fruit market, with everyone yelling their prices at each other. 

So let's roll  with that.

Let's say a vendor at this market has a sign saying "$2 Avocados".

I take a look, and either I don't think they're worth that or I do but think I can get a better price, so I say "$2? That's daylight robbery! I'll give you $1.50 and that's my final offer!"

I'm saying "The most I'll pay is $1.50. Take it or leave it."

There's now two options. 

He can ignore me (& probably insult me) because he thinks that's way too low for his avocados, so he's not going to sell them at that price.

Or he can agree, and probably still insult me but sell me the avocados for $1.50.

My offer there is essentially a limit order.

I'm specifying the maximum price I'm willing to pay, and the market then decides whether that's a reasonable price or not and reacts accordingly.

The vendors "$2 Avocados" sign is also equivalent to a limit order, but a sell compared to my buy. I (the market in this case) have decided it's not a reasonable price and countered with my own limit, a buy at a lower price.

If you've ever heard of "Asks" and "Bids", this is what they're referring to.

The vendor is "Asking" for $2 for his avocados.

I am "Bidding" to buy his avocados for $1.50

The gap between these two, in this case the 50c difference between $1.50 and $2, is what's known as the spread. 

There's two aspects to each limit order though, price - which we've just covered - and amount.

Amount (often used interchangeably with volume, liquidity, and position size) is how much of an asset people are looking to buy or sell at their specific price.

Orderbooks

All of this gets represented on exchanges in the orderbook. 

In red, we have all the sell limit orders (Asks). You can see their price, the amount of liquidity at that level, and the third column is the total liquidity up to that price, so for $16,540, the total combines the amounts available at $16,539.7, $16,539.9 and $16,540 and shows there is 7198 contracts available to that price (K stands for kilo which means 1,000).

The buy limit orders (Bids) are shown in green.

 

Partial or Non-Filled Orders

Let's say that I'm buying these avocados because I run a highly lucrative avocado toast business, and I need 100 avocados for my orders tomorrow.

If this vendor has 100 avocados, and agrees on my $1.50 price, he has filled my entire order.

However, he may only have 10 avocados, and so after buying his 10 I'm still 90 short. I can walk around the market trying to buy the other 90 for $1.50 each, but if no other vendors are willing to sell for that low I'm only going to partially fill my order. 

This can happen in trading too, where only a portion of your limit order gets filled.

When this happens, the order will typically remain until either the market returns and fills it, or you elect to cancel the order.

It's also possible for price to reach your limit and not fill your order at all.

Orders in the orderbook are typically "first in, first served", so it's possible orders will be at the same price as yours and fill, then price moves away before your order fills.

This would be the equivalent of me being in line at the stall only to see the person in front of me claim the last ten avocados at $1.50.

While the vendor was happy with that price (market reaches the price my limit was set at), he can't sell avocados he doesn't have. If no-one else will sell at $1.50, I'm out of luck and can't fill my order (not enough volume at my buy level, my order does not fill or may only partially fill).

It's important to note that in my experience partial fills are rare, but they do become more common on low volume coin pairs and large order sizes.

 

When a Maker becomes a Taker

A super common issue I see people have when trading on exchanges is "There's a bug! I put my limit in and and it filled straight away"

When this happens their limit order is acting as a Taker.

Limits can mimic market orders if they are put into the book on the "wrong" side of price.

Wrong being above current asking price for a buy, or below current bid price for a sell.

This would be like me going to that vendor with the $2 avo's and saying "I'll give you $5 an avocado!"

Of course he'd take it.

Luckily for me, every exchange I've seen will force him to sell them at the $2 he had his limit order sitting at, rather than filling his limit at the $5 I've offered.

In these cases, the limit order becomes a taker, as it's now taking liquidity from the books, and it would be charged the relevant fees.

If for some reason you do want to put a limit buy above the current price without it filling as a taker, you need to use a Stop Limit order.

 

Market Orders

A market order, often called a taker order, is an order that will buy a given amount of the asset, regardless of the price currently being asked.

If we continue with the fruit market analogy, a market order is like me walking in and seeing one vendor has 10 avocados priced at $2, another has 70 selling for $2.50, and there's a few selling for $3.

I still want my 100 avocados, and I'm smart enough to know I should buy all the cheapest ones first.

So I buy the 10 for $2, the 70 for $2.50, and get my remianing 20 for $3 each so I have the 100 I need.

You'll note that the sellers in this case where again essentially behaving as limit orders. They specified their price, "Making" the market (which is where the maker term comes from) and I agreed to their prices "Taking" the liquidity from the market.

Rather than me specifying a price, I'm telling the exchange I'm happy to pay whatever the current asking prices are, as long as I get my order amount.

If we go back to our earlier example from the orderbook, I can use it to see what the most I'm going to pay per contract is.

If I want to buy less than 3000 contracts, I can see there's enough volume at $16,539.7 to fill my entire order. 

If I wanted to buy 10,000 though, we can use the Total (Cont) column on the right to see how far up the order book I'm going to have to buy.

There's 11.254K liquidity up to $16,540.2, so if I market buy 10,000 contracts I know that $16,540.2 is the maximum I'd pay, and my average entry would be somewhere between $16,539.7 and $16,540.2.

Market orders don't often have the same issues as limits do with partial fills, although they can happen, but they do have the complication of slippage.

Slippage

Slippage is essentially what happened to me in my avocado scenario above, and in our orderbook example when we bought the 10,000 contracts. 

I saw avocados selling for $2, but by the time I bought my 100 I paid much more than $200 for all of them.

This is because there wasn't enough volume at $2 for me to fill my order, so I had to keep going up in price, meeting what the sellers asked for, until I had my 100.

To calculate what I actually paid for my average avocado (the equivalent of average entry on a trade) I can do some maths, getting the total cost of what I paid and then dividing that by the number of avocados I brought, to find the average price paid.

Total Price =

Position Size 1 x Position Price 1 + Position Size 2 x Position Price 2 .... Position Size n x Position Price n

So for our example, that becomes

Total Price = 10 x $2 + 70 x $2.50 + 20 x $3

=$255

Which we then divide by the number of avocados to get our average price

Average Price = Total Price Paid / Total Position Size

Average Price = $2.55

 

Now imagine that someone walked in just before me and shouted "I'll buy 100 avocados right now, lowest price first". He then gets my hundred, and I have to buy my hundred for $3 and above.

In both of these scenarios, despite me seeing avocados priced at $2 when I walked in, slippage - either my own or the markets, caused me to have to pay much more than $2 for my avocados by the time I was done.

Slippage can happen anytime, but there's a few common causes

1. Low Liquidity pairs

The avocado scenario is a good example, there was no-one selling from $2 until $2.50, so once all the $2 avocados are brought price jumps straight to $2.50. 

If there'd been a seller at $2.10, the jump in price and subsequent slippage may have been much smaller.

2. Large Position Size

In the same nature, my large order of 100 avocados caused slippage there.

If I only wanted a few avocados for myself for the week, I could have bought them all for $10 without causing slippage (Which for the limit order vendor, would have been a partial fill)

3. Volatility

Highly Volatile moves - enormous candles, will often cause slippage. 

As I've said a few times, exchanges work by first in - first served principles. 

Meaning if 30 other people had their stop loss in front of yours, even though yours is triggered it doesn't fill until those 30 people's have, leading to large slippage on your order.

4. Scalping

Technically just 1,2 & 3 combined with a little extra. Scalping often has slippage issues due to low liquidity very close to price. Small stops lead to large position sizes to meet risk requirements. Higher "volatility" because normal moves on the 1h chart can be enormous candles on the small timeframes.

But scalping also combines these with step sizing. Step sizing is essentially the minimum increments the exchange will allow:

We can see in this screenshot, all the prices orders sit at end in .0 or .5. 

This is because BitMEX limits XBTUSD to increments of 50c.

This makes slippage a bigger issue while scalping, due to the nature of the setups.

Why is this a big deal?

Let's say on another hypothetical symbol we market buy into two identical trades of 1000 contracts.

The orderbook on this symbol has limit sells of 500 contracts at $20, and 500 at $20.5, so we get an average entry of $20.25.

On a scalp, we may have been shooting for a TP of $22, so that slippage has just eroded 12.5% of our profit.

On a higher timeframe trade we may have been shooting for a $30 target, so that same slippage has now only eaten up 2.5% of our profits.

 

 

Fees

Aside from the differences in how the orders themselves work, the biggest difference is the fees exchanges charge for each order.

Limit's will usually have a much smaller fee when compared to market orders. Some exchanges, such as BitMEX, even offer a rebate.

The reason for this is exchanges want to incentivise limit orders, as they are what creates liquidity (which is why they're called "Maker" orders, they are "Making" the market) and high liquidity is a major draw for both traders and the exchange itself.

For traders it reduces volatility and slippage and increases their ability to trade without partial fills.

For the exchange, who takes a cut of all trades, more liquidity means more traders, more traders means more trades, more trades means more profits.

Market orders are where the exchanges make their money. 

They charge a larger fee, as you are taking liquidity from the exchange (hence "Taker" orders).

Fees will make a significant difference to your P&L, so it's worth keeping an eye on them and seeing how different orders give different results.

Currently OKX has a Maker fee of 0.02% and 0.05% for Takers. Meaning limits get you a 40% discount on fees.

BitMEX has a Maker Rebate of 0.010%, and a Taker Fee of 0.075%.,

These numbers may not seem like much, but that's on the entire position, so it can add up quickly.

We can see here, just by switching the take profits from market orders to limit orders, we save almost $58 in fees, or almost 3.5% of the total P&L.

This difference will become even more prominent when scalping, due to the nature of the moves targeted. 

When targeting a 10% move, a 0.075% fee is quite small (0.75%) compared to the targeted gain.

However, if targeting a 1% move, that Taker fee now becomes 7.5% of the targeted gain.

This is why VEMA also includes the Risk to Reward with fees estimation (outlined in white in the above screenshot), as fees can make an enormous difference to your final P&L and should be taken into account. Scalpers in particular will notice the difference limit orders can make to this value.

It's also important to note you pay fees twice, once on entry, once on exit. 

Currently VEMA supports Limit orders for Take Profits, but Limit's on entry will be added soon. If it's a feature you want to see head here and vote for it to increase it's priority in our roadmap.

 

Conclusion

Hopefully if you're still awake by the end of this you've learnt a thing or two about market orders and limit orders, and which to use for your trading strategies going forwards.

As always, if you have any questions feel free to reach out in our Discord Server or by contacting us at support@vematrader.com

As always, 

Have a great day, Happy trading, and I'll talk to you very soon,

Rhys