The authors analyze the rationale for limit order trading. Use of limit orders involves two risks: (1) an adverse information event can trigger an undesirable execution, and (2) favorable news can result in a desirable execution not being obtained. On the other hand, a paucity of limit orders can result in accentuated short-term price fluctuations that compensate a limit order trader. The authors' empirical tests suggest that trading via limit orders dominates trading via market orders for market participants with relatively well-balanced portfolios, and that placing a network of buy and sell limit orders as a pure trading strategy is profitable.

We analyze the rationale for limit order trading. Use of limit orders involves two risks: 1) an adverse information event can trigger an undesirable execution, and 2) favorable news can result in a desirable execution not being obtained. On the other hand, a paucity of limit orders can result in accentuated short-term price fluctuations that compensate a limit order trader. Our empirical tests suggest that trading via limit orders dominates trading via market orders for market participants with relatively well balanced portfolios, and that placing a network of buy and sell limit orders as a pure trading strategy is profitable.

We analyze the rationale for limit order trading. Use of limit orders involves two risks: 1) an adverse information event can trigger an undesirable execution, and 2) favorable news can result in a desirable execution not being obtained. On the other hand, a paucity of limit orders can result in accentuated short‐term price fluctuations that compensate a limit order trader. Our empirical tests suggest that trading via limit orders dominates trading via market orders for market participants with relatively well balanced portfolios, and that placing a network of buy and sell limit orders as a pure trading strategy is profitable.