Over the last few years, crypto trading has been one of the most popular ventures— especially for the young generation. However, there is still some gap that needs to be filled despite increased participation. One such is helping these traders, most importantly, beginners understand the concept of orders whether on exchanges, software, or broker platforms.
Reputable cryptocurrency websites always warn beginners to be wary when jumping into trading without doing due diligence. So, in this article, we will do our best to help you understand order types in crypto trading and everything else related to it. Read on! But first, let’s go down memory lane a bit by looking at Bitcoin’s history.
You would recall that in 2009, there were not many options to trade cryptocurrency. Most trades happened with the peer-to-peer offer across several countries. However, that process has been improvised today and you may not necessarily need to be involved in peer-to-peer before trading crypto. Of course, there are risks associated with the process but what would you have traders do when there was less advanced technology?
Many years later, there are now reliable exchanges that offer several methods as long as customers comply with their Know Your Customer (KYC) process, and Anti-Money Laundering (AML) regulations. This advent of crypto exchanges is what has led to the understanding that there is something known as order books and types.
However, it is important to note that the order types in crypto are a bit different from forex and other financial markets. For cryptocurrency trading, order types are specifically developed to help traders buy or sell an asset at the time and price that aligns with their goals with the most minimal losses
In addition, these order types are not made for crypto whales alone but also for retail investors. So, those with moderate trading capital in the space also have unrestricted access to progress with their buying and selling. Interestingly, using the order types method means that you do not have to concern yourself with central authorities or third parties. Therefore, making it easy to trade these days.
So, the days of trading with maximum stress are gone as you do not require a long time on the charts or screens to have a trade executed with the order model. But before we go deep into the types of orders we have in the crypto market, let’s help you understand what order books are in the next segment.
Order Book: What Does It Mean?
In simple terms, an order book is simply defined as a list of buy and sell open orders for a particular trading pair. Advanced traders might call it long and short. For context, to long is to buy, and to short is to sell. You can also describe an order book as a market open to anyone ready to bid for an asset either to short it or long it. All these are done in a bid to earn profits.
In addition, the order book is always open until a trader decides that he wants to take profits, count his loss or cancel a trade. So, in order books, you can have trading pairs like Bitcoin against Ethereum, Solana against Tether, and the like. Next, let’s go into the main thing by looking at the types of orders available in crypto trading.
Types of Orders in Crypto Trading
There are several kinds of orders in cryptocurrency trading. However, most of the usage of these order types depends on the objective of the trader. So, are you interested in “eyeing” an increased price or do you feel the price of an asset would decrease? All of these would determine the kind of order that you would be interested in. Order can exist in different kinds of markets. If you trade the spot market, there are orders you can use. On the other hand, if you take more risks with the futures market, there are also orders specified for you. Let’s get right into it.
By definition, a market order is simply a directive by a trader to buy or sell a crypto asset at the most profitable price available in the crypto market. Unlike other orders, we might touch, market orders are executed immediately after a trader places one. You can also refer to this as the simplest kind of crypto trading or order type. So, what are the advantages and disadvantages attached to market orders?
One of the pros of using market orders is that traders do not need to worry about reaching specific targets. They just allow the market to do its job. This is not the case with other types of orders. For others, there are more speculations and predictions that you can fully avoid by focusing on market others. Also, the risk associated with market orders is extremely minimal compared to those of the other order types.
Another advantage is that market orders are executed instantly. Traders do not need to concern themselves with waiting or immediately getting liquidated as soon as they place their buy or sell trade. Next, let’s look at the drawdowns of market orders.
One significant drawdown of market orders is that multiple orders can be filled at lower prices than expected. This is because the orders are instant. So, imagine you place an order when Bitcoin was $34,000. Then, almost immediately after you placed the order, the price slips to $32,500. The market would not execute your order at $34,000 but at $32,500. So, in that case, you have missed your target entry. Apart from this which is commonly known as slippage, there is hardly any other con to market orders. That said, let’s move to other kinds of orders in the crypto market.
The second kind of order we will touch on is the limit order. For context, a limit order in crypto is commanded by a trader to buy or sell an asset at his own specified price. So, in this case, it does not matter if the market price is trading higher or lower than the trader’s desired price. The trade will only be executed when the asset price hits the traders’ entry point. This kind of order is suitable for patient traders. At times, filling the order could take a few minutes or hours. In other cases, they can take a few days before execution. Now, let’s look at the pros and cons of this kind of order.
Limit orders are different from the initially described market orders in the sense that they offer more freedom. So, traders using limit orders care less about market price as they have more control. In summary, one advantage you can point to is that limit orders allow traders to set their minimum or maximum price to buy or sell.
Another advantage is that they can minimise their risk of loss if their trade is not executed yet by cancelling the order. You know how volatile the crypto market can be. So, in cases where the market flips its direction, traders can exit with little to no loss.
The downside is on the part of the execution. Because limit orders do not depend on market price, they might sometimes not be excited if the asset price does not hit their desired target. Other times, the orders are only fulfilled partially.
A stop order is set to buy or sell a cryptocurrency at the market price once it has hit the stop price. In that case, the order becomes a market order and is filled at the next available market price.
This order type helps traders protect profits and limit losses. However, just like limit orders, they might not execute even if the price target is met.
Stop orders can be market or limit orders. A stop market order is based on the condition that a price hits a predefined target (the stop price), and in that case, it executes immediately. Stop-limit orders are slightly more complex and require a further explanation that we are providing here.
Lastly, let’s look at stop-limit orders. From the name, this kind of order is similar to the limit orders. However, the only difference is that traders even get to enjoy more freedom than limited order offers. So what are stop-limit orders?
A stop-limit order is a type of order that buys or sells crypto assets once a particular stop price is reached. In other words, you can define it as a kind of order that will execute continuously until the entire order gets filled. So, you can avoid the price being filled at a price that you do not want. Moreso, you have more control over what happens with your order than using the market or limit order. You may be confused at this point but we will do well to give an example.
So, let’s imagine you place a stop price for Ethereum at $3,500, which is the price to set off the order. And as a trader, you think the price can go as high as $3.7000. You can set a maximum limit price within that region. This region will be considered the price that the asset that will be bought. So, you can take profits when the price hits $3,500, and it doesn’t stop there. By choice, you can continue raking in profits if the market aligns with your objective to hit $3,700.
For its advantages, a stop-limit sell order can help traders determine the minimum price they are willing to buy an asset. At the same time, this kind of order allows traders to set a maximum price at which they want an asset to be bought. So, if the maximum price is not hit, the minimum price set can do its job of execution.
One other price of stop-limit orders is how potent they are in controlling the volatility of the crypto market. Since it offers more flexibility, traders can effectively minimise risks.
However, the one notable disadvantage of stop-limit orders is the inability to execute orders automatically. Apart from that, it is also similar to the limit order as execution can also be partial unlike the case with market orders.
Finally, you should know that an excellent understanding of order types can help you go far in trading. While it does not guarantee anything, it puts you in pole positions to become confident and reduce the possibility of potential losses. However, you should only take this as an informational piece, and no part of it should be regarded as financial advice. If you intend to gain more knowledge, do your best to research further.