Like traditional exchanges in the stock market, a variety of order types are also available when buying or selling cryptocurrencies. Understanding each order type becomes a necessity if you wish to step up your trading strategy and make it efficient.
The variations of order types in crypto trading allows traders to take advantage of volatility or protect them from market shocks. In this article, we will explain the main order types used in crypto, how they differ from one another, and when to use the right one to help you make sound decisions when trading
Defining Crypto Order Types
The cryptocurrency exchange market is now worth billions of dollars, with some carrying out over $50 billion dollars in daily trades alone. Crypto exchanges today are competing to retain and grow their consumer base by offering a variety of tools to make the best trading decisions, maximizing profits while minimizing losses.
Crypto order types are designed to aid any crypto trader when buying or selling assets at the the exact moment the assets’ prices are within their expectations, reducing the risk of potential permanent loss. As blockchain technology continues to improve, so as automating crypto trading. Crypto traders can continue their trading routine without the involvement of an intermediary, all done within their smartphones anytime and anywhere. Gone are the days when trading cryptocurrencies seemed to be a daunting process that took hours to complete.
Before discussing the different crypto order types, we must check what order books are since they define order visibility and how it ranks in the market.
What is an exchange order book?
An order book is simply a separated list of buy (bids) and sell (asks) open orders for a specific trading pair. It can be identified as a marketplace that anyone can join by placing a bid if they want to buy an asset or asking for a price if they’re going to sell it.
The open order stays in the order book until it’s canceled or someone accepts the bid or agrees to pay the asking price for the specific asset in the case of a sale.
Each trading pair, like BTC/USD or BTC/Ether (ETH), will have its specified order books.
Order Types Used in Crypto Trading
Seasoned crypto traders know that understanding the right order type to use leads to a dynamic trade execution. Here are the most popular crypto order types and how they work.
Market Order
A market order is an order from a trader to start the buy and/or sell process at the best market price. It is usually executed instantly or at the next best opportunity. The current market rate usually determines the price the order initiates in the order book. An order book displays the demand and supply activities of a particular cryptocurrency. It is publicly available to users on an exchange to see. The order book data changes as traders add, withdraw, and modify orders.
A trader executing a market order only needs to state the amount of an asset they would like to buy or sell. The trader doesn’t need to specify the price as the order is executed based on the best market rate.
Let’s say you want to buy 5 Litecoins (LTC) with the price of 1 LTC being $60; you pay $300, and your trade executes immediately. However, if you are not comfortable buying LTC at $60 and want a lower price, say $50 for 1 LTC, you can create a limit order for a purchase of LTC when the price gets to $50. So now, let’s look at how a limit order works.
Limit Order
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’ desired price. 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.
For example, a buy limit order can be set to buy $10,000 worth of ether (ETH) when its price drops to $5,000. The same goes with a sell limit order, you can set it to sell the same crypto when the price rises to $10,000. All you have to do is place the order and patiently wait for the price to trigger them. Do note that setting the price of the order does not automatically assure you of profits — if the price is not met, the order will never be triggered.
Stop Order
A stop order buys or sells a crypto asset once the price reaches the stop price. In this case, it becomes a market order filled at the next available price to lock in profit.
If you speculate that the price of a coin will grow, you can place a stop buy order. You specify the amount of crypto to be bought once the price reaches a certain point. Let’s say that you feel confident that the price for 1 ETH will rise from $60,000 to $62,000 in the next couple of days. Buying ETH when the price reaches $61,000 will ultimately result in each of your coins being worth $1,000 more if the price hits $62,000.
Stop sell orders are commonly used to protect against losses in the volatile environment of cryptocurrencies. If you suspect that the price of ETH will fall, but are not sure when, you can place a stop sell order just below the current market price. If the price falls from $60,000 to $50,000 and you’ve opened a stop order at $58,000, for instance, then you’ve neutralized 80% of the loss.
Stop-limit Order
A stop-limit order is one of the ideal tools for limiting the losses incurred in a trade. This type of order allows users to set a stop price and a limit price. If ETH was trading at $10,000 and you set up a stop-limit order at a stop price of $9,900 and a limit price of $9,895. Then a limit order at $9,895 will be placed when the price dips from $10,000 to $9,900.
However, the order is only placed after the stop price is hit. You do still run the risk of the price not recovering, in which case you have no protection if it continues to dip below $9,985, and the order may not be triggered.
Final Thoughts
A thorough understanding of order types and how to use them will get you far in the crypto space. Though it does not guarantee the profits you dreamed of, these tools put you in a better position to become confident in trading and effectively manage potential losses. Keep in mind this is solely an information article and should not be considered as financial advice. View multiple resources to gain more knowledge on these tools.
