Order definition

In this lesson, you'll learn about:

• Limit order
• Market order
• Stop order

If we take a simplified approach, an order on a crypto exchange is a tool for acquiring or selling an asset at a price preferred by the trader. As a result, order types represent different ways of ordering the purchase or sale of a specific asset. They are recorded in special blocks called order books, which are usually located on the main page of the platform.

To execute a specific operation, a trader must specify several parameters, based on which the types of orders on the crypto exchange are determined:

• the asset that the trader decided to buy or sell
• the size of the asset being bought or sold
• the exchange currency for which the trader decided to exchange the asset
• the preferred price per unit of the asset
• the order type

The execution time of an operation depends on the order type, as well as the parameters specified by the particular trader. Execution can take anywhere from several minutes to several days. For example, a trader decides to sell one bitcoin for $50,000: if a buyer is found for this amount, the deal will be concluded — however, there must be both a potential seller and buyer present. Sometimes the conditions specified in the order don't correspond to market realities until a certain moment, and as a result, the execution of the deal may be delayed. In such a case, the order continues to remain in the order book. If an order isn't executed for a long time, the trader usually cancels it themselves and creates a new order with different parameters.

Everything is quite simple when a person constantly monitors cryptocurrency rates online and can make a transaction quickly, but everything becomes more complicated when they only check quotes a few times a day and aren't constantly at the terminal. In such a case, they may miss a sharp price jump or a change in the market situation, for example, due to sudden news. Let's say this could be a decision by a major world economic power, such as the USA or China, about the complete legalization of bitcoin, which would inevitably lead to a price surge. It's precisely to make a transaction at the right moment that different types of orders exist.

Limit Order

Many traders call this order on a crypto exchange basic, so most often beginning investors start with it. Order types of this kind involve not only specifying the quantity of the asset for purchase and sale, but also the desired purchase or sale price. Such an order on a crypto exchange is suitable for those who fear missing a sharp jump in cryptocurrency rates. For example, investors may be waiting for the announcement of important news that will inevitably lead to a change in the rate, and then they submit this type of order. In anticipation of an increase in the value of bitcoin, one can set a maximum price of $65,000 and sell the cryptocurrency at exactly that price, as soon as and if it reaches the required level.

This type of order on a crypto exchange has a disadvantage. First, if the number of those wishing to make a similar transaction is quite large, then market supply may not be sufficient to conclude a transaction submitted as part of a limit order. In such a case, the order will remain unfilled. Second, the rate may change sharply over a fairly short period of time — in such a case, bitcoin may rise to $75,000, and the order for $65,000 will remain unfilled. Finally, third, if the trader specifies too high a price, for example, $85,000 for bitcoin, then the transaction also won't happen, because the cryptocurrency simply won't reach that level.

Similar dangers await limit order holders when concluding transactions to purchase assets. For example, a trader expects a rate drop and sets a price of $40,000 for bitcoin. If the market rate doesn't fall to this level or there aren't enough people willing to sell their coins at such a price on the market, then the transaction won't happen again. Another danger is to set a limit above the market. For example, if bitcoin drops to $30,000, and you set a limit at $40,000, then the rate will continue to fall, but your transaction will be concluded. Therefore, in the case of buying, it's recommended to set limits slightly above the market, and in the case of selling — below the market.

Market Order

The second most popular order on a crypto exchange is usually used by those who decide to sell an asset right now and at the current price. It's most often used by those who independently monitor rate changes and react to them literally online. Such orders on a crypto exchange allow you to conclude a transaction manually at the right moment. They are used by those who decided to sell a certain asset and lock in profits or acquire a certain asset here and now.

An operation when executing a market order is usually executed within a few seconds, but no longer than a few minutes. In such an order, the seller or buyer simply indicates the quantity of the asset being bought or sold, and the rate applied is the one that has formed on the crypto exchange at that moment. Essentially, these types of orders are used in any exchange service.

Such orders on a crypto exchange have one significant disadvantage—at the moment of concluding the transaction, the rate may change sharply, for example, due to an increase in those wishing to make a transaction with the same asset or a sharp jump, and then the transaction may be concluded at an unfavorable price.

Stop Order

Such orders on a crypto exchange are most often used by experienced traders who can independently analyze and forecast future rate changes. For example, a trader expects that the bitcoin rate will change by $5,000 in the near future, but at the same time they aren't prepared to undersell when concluding a transaction and sell or buy cryptocurrency before reaching the desired indicator. In such a case, they set maximum and minimum prices in the order.

As a result, when the rate changes to the level they need, they will be able to buy or sell cryptocurrency at the price they need. Conditionally, this principle can be described as follows: we buy bitcoin at $40,000, and sell at $65,000, but in reality, this corridor being set is, naturally, much narrower.

The main risk of using such an order is traders' excessive overconfidence. One can recall how many sold cryptocurrency in early December 2017 for $10,000, being convinced that bitcoin wouldn't grow further, and as a result missed out on profits when BTC was already worth $20,000.