Real live trading experience: Market Vs Limit orders

P

pstrusi

I've been developing automatic strategies ( day trading ) for quite some time. As you must know, once you have an interesting Backtest, the logic next step would be a real-time simulation, where the critical "filling" orders, could be easily, one of the most important reasons why remarkable differences found between Backtest and Real-Time.

I've listened several opinions from experts, senior members and my own experience. The conclusions are still general and rather depending on many factors, such as: the market you're trading, the instrument, day's conditions, general liquidity...etc. So I'm interested to know more experiences, point of views..etc among this community.

Let me share some personal experiences:

I've seen limit orders filled about 85% of time, and despite it doesn't sound very bad unfortunately left working order opened might cause: unsync of calculations and signals or just losing potential profitable trades; obviously this could be avoid using market orders; so as you can imagine if a period of high and fast volatility comes suddenly, market orders could help your Algo a lot.

Mostly of time, liquid markets has low spread and price variation, so Limit orders have more efficient entries than market orders, which slippage might kill your profits; but in the other hand,when market turns wild, cause not predictable "black swan" or "Fat-finger", limit order might let you in troubles.

So, I'd like to know experiences or suggestions regarding to this critical point, I'd highly appreciate your comments.

Thanks in advance
 
In your back tests, how are are you modelling limit order fills? Have you done any analysis to try to determine why the 15% of your limit orders aren't being filled? It is to be expected that in some situations, the market will move away from your limit order... your algorithm should be robust to this, and cancel the order(s).

I have one of my automated strategies set up what I call "Order Triplets". An opening limit order, a take profit limit order, and trailing stop market order. The orders are tied to each other with a state machine (a bunch of switch statements), and will be cancelled/flattened/released if the market conditions change.

I think the use of market vs limit orders really depends on how much of a move you are trying to capture. If you're scalping, I think you need to be conscious of the efficiency of your executions since single pips count when it comes to the overall profitability of your strategy. If your trying to get in on a fast moving trend, maybe market orders are okay (but I would still opt for a well positioned limit order). Personally, I only use market orders for stops.
 
Personally, I would never use market orders on many of the stocks I trade. You could have used market orders maybe a decade ago and you would do fine. But I am bewildered a lot of the time about how illiquid the market is and how wide the spreads are during supposedly high volume times of the day. However, if you are trading high volume securities, then market orders should work fine (i.e., SPY).
 
Hi IAS,

Thanks for your interesting response. The practical way of your orders style will surely pay off most of the time.

The reason for the "not fillings" of my Strategy is basically that the Algo takes around 400 mllscs to put an order to "working", which for fast markets is an eternity. I'm still trying to improve it, but is not easy to deal with deep technicality of software. Meanwhile protective orders will be a solution of common sense.

Thanks
 
sprstpd said:
Personally, I would never use market orders on many of the stocks I trade. You could have used market orders maybe a decade ago and you would do fine. But I am bewildered a lot of the time about how illiquid the market is and how wide the spreads are during supposedly high volume times of the day. However, if you are trading high volume securities, then market orders should work fine (i.e., SPY).
More...

Hi Sprs,

I've selected high liquid forex instruments to be able to count on better spreads for market orders or even some liquids futures such as ES. I don't trade stocks cause what you say, and nowadays we're living markets driven by computers in 60% at least, which is the recipe for wild markets and disasters for many.

Thanks
 
It depends of how your trading style is and what markets you trade. Do you enter before or after a trend is developping? Check in your simulations when you enter. You could also simulate both entries and see what in the long run will be the best solution.

I trade the ES and I ALWAYS trade at market because my tests showed clearly that the missed profitable trades were much more expensive than the sometimes not so good market price.
 
That's just the biggest reason why tend to choose "market orders". I'm a day-trading, trying to pick trends in their early phase. Maybe a profitable way ( meanwhile ) is setting protective orders, closing your trade in a bracket by the more frequent price variation in average.

Thanks
 
i don't know any "trader" that Ever uses Market orders
[although i admit, i haven't met them all]

worst case [wanting an execution Now],
you could use a Limit order - above [or below] the current ask [or bid]

marc
:banghead:
 
marcoPolo21 said:
i don't know any "trader" that Ever uses Market orders
[although i admit, i haven't met them all]

worst case [wanting an execution Now],
you could use a Limit order - above [or below] the current ask [or bid]

marc
:banghead:
More...

I kind of prefer to use market orders -- I just want to get filled ASAP...the few pennies doesn't make that much of a difference anyways in the greater picture. -- But then again, I dabble in highly liquid stuff...so the spread is relatively tiny and easily filled.

(For everything else, one should generally use limit orders though...so you won't get surprised by a far out market fill price.)
 
I am going to assume you are what we call a retail trader. May I suggest in all your algo testing that you reduce all profitable trades by two tics and increase all loses by two tics. If you are still making a net profit, then your algo has a good probability of making a profit when live. Of course this eliminates any possibility of profitable scalping, but as a retail trader you should not attempt to scalp in any case.
 
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