A market order says fill me now, whatever the price. A limit order says fill me at this price or better, whenever that becomes possible. You can have certainty about execution or certainty about price. Not both.
For a systematic strategy this is a design decision, not a preference. A rebalance that must complete on a specific morning cannot tolerate an unfilled leg, because a portfolio that is half rebalanced is not the portfolio you tested.
The trade-off
| Market order | Limit order | |
|---|---|---|
| Fills | Immediately, while the book has depth | Only if the market reaches your price |
| Price | Whatever the book gives you | Your price or better |
| Main risk | Slippage, especially in thin names | Not filling at all, leaving the portfolio off-target |
| Suits | Liquid names, scheduled rebalances | Patient entries, illiquid names, discretionary trades |
How it interacts with a backtest
A backtest that fills at the next bar’s open is implicitly assuming a market order placed into the opening auction. That is the honest default, because it is what a live system can actually do. The corresponding cost assumption is that you pay the spread and any impact, which is why slippage has to be modelled rather than set to zero.
If you instead backtest limit orders, you also have to model the fills you would not have received. A simulation that assumes every limit order fills at the limit price is optimistic in the direction that flatters you: it fills your good trades and quietly skips the ones where the price ran away.
Indian-market specifics
Equity trading on NSE opens with a call auction before continuous trading begins, so an order placed for the open participates in the auction rather than crossing a live book. Price bands and surveillance measures also constrain how far a market order can travel. A stock in a narrow band or a trade-for-trade segment behaves very differently from RELIANCE or HDFCBANK.
Some brokers restrict or convert market orders in specific segments and products. Which segments, and how the conversion works, is broker policy rather than exchange rule.
Caveats
A market order in an illiquid stock is the fastest way to discover how thin the book is. The order fills, but it walks up several price levels doing so, and the average price you receive can sit well away from the last traded price you saw on screen.
Size the order against the book, not against your conviction. If your intended trade is a meaningful share of the stock’s daily volume, no order type saves you, and the honest answer is a smaller position or a different name.