A trade that gets executed at a far away price from the current market price is called a 'freak trade'. Freak trade occurs owing to a shallow market depth (low liquidity). A freak trade can also occur if your trade coincides with a large market order.

When you place a market order, there is always an inherent risk of losing money due to a freak trade.

A limit order on the other hand guarantees price execution at a specified price (avoids freak trade), but there is no guarantee of the order fill itself.

But there is a way to have the best of both order types, i.e to enjoy the price protection of a limit order (hence no freak trade) and also enjoy the order fill guarantee of a market order.

Use limit orders as market orders.

If you place a buy limit order with a price above the current market price, your limit order will act as a market order, with market protection of the limit price you have mentioned.

So for example -

Current market price of ITC = Rs.241

Limit buy order = Rs.245.

Since the price is Rs. 241 and you intend to buy at a higher price, this order will act as a market order and execute immediately. Here, all quantities up to Rs.245 will get filled.

In this case, if there is a large market order coinciding with your order, resulting in a price spike, then your limit order will ensure you are protected against the spike by limiting your buy price to 245 and not beyond.

Similarly, if you place a sell limit order with a price below the current market price, your limit order will act as a market order.

For example, assume you are long on Nifty 17500 CE and its current price is Rs.185. You place a limit sell order at Rs. 180.

Since the current market price is Rs. 185 and you are placing the limit sell order at a lower price, this order will act as a market order and execute immediately. Here, your order will sell all available quantities up to Rs. 180.

In this case, if there is a large market order coinciding with your order, resulting in a price spike, then your limit order will ensure you are protected against the spike by limiting your sell price to 180 and not lower.

Note: The further the limit price from the current market price, the lesser the chances of your limit order going pending, but higher the potential impact cost.

To know how to use Stoploss-limit(SL) order like a Stoploss-Market(SLM) order, click here .