Here’s the scoop straight from the SEC on limit orders. 

Extra Insight:

Limit orders are one way to reduce slippage because you specify the exact price you are willing to accept.

Backtesting with end-of-day data models limit orders reasonably well for liquid markets.    The backtesting engine will execute the whole order if the stock traded at limit the price during the day.  This is what normally happens in live trading.    Sometimes in live trading though, the full limit order doesn’t execute, but only a smaller number of shares are traded at the limit price.   This can happen if the limit order is larger than the market can bear at the time.

A small private trader is unlikely to get a partial fill in a large liquid market.   By sticking to high volume stocks, its possible to understand more about the differences between market orders and limit orders via backtesting.

There are Limit-on-Close (LOC) and Limit-on-Open (LOO) orders which corresponds to Market-on-Close and Market-on-Open orders, respectively.   I don’t use them in backtesting though.

Updated: 11/12/08.

Tags: backtesting, data, limit order, market-on-close, market-on-open, trading

A Market on Open (MOO) order is entered before the market opens and the transaction takes place at the day’s opening price.  

The US stock exchanges process these orders.  Check with your broker for exact instructions on how to enter them.

Extra Insight:

Due to using historical end-of-day data, a next day market order in backtesting behaves most like a Market-on-Open order because it takes the opening price.   

For large orders in thinly traded markets, a live market order might move the live market, resulting in a different opening price than would have occurred without the order – an effect that’s not modeled with historical end-of-day data.

Several traders report that live MOO orders don’t always execute at the published open prices.   Read a trader complain of worse prices here, and a professional find better prices here.

Updated 11/12/08.

Tags: backtesting, data, market order, market-on-open, trading