Limit order and opportunity cost

Discussion in 'Strategy Building' started by jbusse, Nov 12, 2005.

  1. jbusse


    Is there a general rule regarding whether one should enter a limit order vs. a market order, and how far the limit order should be placed away from the market price? A limit buy order saves the difference between the ask and the limit price, but the limit order may never execute. So, I'm wondering if there is a general rule that says, e.g., by placing a limit buy order at the current bid, the order will execute 95% of the time, saving the spread, and more than making up for the opportunity cost associated with the 5% of trades that do not execute. Any thoughts on how to think about this would be appreciated.
  2. strategy runner had some data on this for a smart order concept that they had a few years ago...go to their .com site
  3. If you trade frequently, using limit orders should save substantial slippage in the long run for you. If you have a longer-term time horizon, you should use market orders because the slippage will be insignificant. More important, if you use a limit order on a trade that doesn't get filled and that trade would have turned out to be a big winner, it can diminish your profitability and mindset.