When a stock hits a targeted entry point, do you place a market order, a limit order, a limit order at the bid or ask, or something else?

We only rarely, rarely place market orders, and that is usually when we are exiting a position with very good profit and just want to get out. Even then, we usually put in a limit order. Why? Because we have consistently been used and abused on market orders.

Market makers have two minutes to fill orders. Wherever the price trades within that two minutes is where you can be filled. We have seen trades clicking along, all within a quarter point of each other, and all of the sudden one comes by $1.50 higher or lower-a price that passed a minute and 50 seconds before. The rules allow them to do it, and the market makers are in it for making money no matter how they say they are there to facilitate trades.

Knowing this, we place limit orders almost exclusively. You are saying you want to buy or sell at the limit price OR at a better price. If you place an order to buy at a limit of 25 and the stock trades lower while your order is in, you could get filled at 24.50. Not bad.

The main question then is where to put your limit-at the ask, the bid, or somewhere in the spread. If we really want a position and the stock is running, we will limit our order at the ask or even move out ahead of the ask an eighth. If we are target shooting for a position, i.e., we want to pick it up at a certain price and are willing to let it come back to us, we sometimes set the limit order at or below the bid. We do this when a stock has been trading in a range and we want to pick it up at the bottom of that range for the day. Still, however, we usually just enter the order when we are ready to buy-we don’t like entering an order and leaving it sit-the market is fluid and too many things can happen.

On most trades, we try to get in the spread. It is a lot like buying a car. Some are happy to go in and pay retail without haggling. Those are the ones who pay for those of us who want to get a better price. The market makers inflate the spread to account or those who will get the better price. Depending upon how the stock is trading and how wide the bid/ask spread is, we will either try to get taken out in the middle or in the upper range. If we want the trade, we will put it in the upper end of the spread.