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On forms, is inline placeholder text better than a label outside each field?

Is putting text field instructions inside the text box rather than having a field label a usability issue?

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Generally speaking I would say yes.

The major problem is once the text box is selected, you don't have the instruction anymore. It might not seem straightforward but in the case the user uses the tab to go from input box to input box, he might not even have seen what the instruction was.

What I would rather do is to give the instruction on one side and add an example inside the text box.

Finally, be sure that when the box is selected, the prior content disappears. (the user should not be the one to erase the explanation/example content)

EDIT: a good example that drives me crazy each time it happens is when filling a date. Many websites put the instruction of how to write it (e.g. YYYY/MM/DD) inside the text box, and each time I have to fill it, I need to click somewhere else to see how to write it, and click back in. So I would recommend you to always put instructions outside (YYYY/MM/DD) and examples inside (1879/03/14).

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