Order Types on a Crypto Exchange (Lesson 6)
In this lesson, you will learn what these are:
- a limit order;
- a market order;
- a stop order.
An order on a crypto exchange is an instruction to buy or sell an asset on certain terms. The order type determines what matters most to you: the price, the speed of execution, or the condition under which the trade should happen. Other participants' orders are visible in the order book — a table of buy and sell orders in the trading terminal.
To place an order, a trader specifies several parameters:
- the asset they want to buy or sell;
- the quantity of the asset;
- the currency they are exchanging the asset for;
- the price per unit of the asset, if this order type requires one;
- the order type.
The execution time depends on the order type and the conditions specified. A trade can go through in a fraction of a second, or it may not happen for several days. For example, a trader wants to sell one Bitcoin for $100,000. The trade will happen only if there is a buyer in the market at that price. If the order's terms are far from the current market situation, the order stays in the order book and waits. If it remains unfilled for a long time, the trader can cancel it and place a new one with different parameters.
A trader who watches the market constantly can trade manually. But most people check prices a few times a day. In that time, the price can change sharply, for example after news about cryptocurrency regulation in major economies. Different order types let you set the terms of a trade in advance and not have to watch the market all the time.
Limit order
A limit order is one of the basic order types, and people usually start getting to know an exchange with it. In it, you specify the quantity of the asset and the price. A buy order will be filled at the specified price or lower, and a sell order at the specified price or higher. This type of order suits those for whom price matters more than speed. For example, with Bitcoin at $100,000, you can place a sell order at $110,000. If the price reaches that level, the Bitcoin will be sold at $110,000 or higher.
A limit order has limitations. First, if the price reaches the order level only briefly and there are many orders at that price, there may not be enough opposite demand for all of them. The order will then be partially filled or not filled at all. Second, the price may stop just short of the order level, for example at $109,900, and reverse. The order will remain unfilled. Third, if you set the price too far from the market, for example at $150,000, the trade may not happen for a very long time.
The same limitations apply to buy orders. For example, a trader expects a decline and places a buy order at $90,000. If the price does not fall to that level, or there are few sellers at that price, the trade will not happen. There is another risk too. The order is filled at $90,000, but the price keeps falling, for example to $80,000. A limit order guarantees the price, but not the direction of further movement.
If it is important to buy quickly but at no more than a certain price, the buy limit is set slightly above the current price, for example at $100,200. The order will be filled immediately at the lowest available ask price, but no higher than $100,200. When selling, the limit is set slightly below the market instead.
Market order
A market order is used when you need to buy or sell an asset immediately at the current price. You specify only the quantity of the asset, and the price is determined by the nearest opposite orders in the order book. A currency exchange office works on the same principle. A market order is usually chosen by those who follow the market themselves and want to open or close a trade without waiting.
A market order is executed almost instantly. But the exact price is not known in advance.
The main risk of a market order is slippage. If the price is changing sharply or there are few opposite orders in the order book, the trade may go through at a worse price than the one you saw on the screen. For example, you expected to buy at $100,000 but bought at $100,150. In a calm market, the difference is usually small; in a sharp move, it can be significant.
Stop order
A stop order is triggered when the price reaches a set level — the stop price. Until then, the order is not visible in the order book and is not executed. A sell stop is placed below the current price to limit a loss. This is the stop-loss from Lesson 5. A buy stop is placed above the current price. It is used when a trader wants to enter a trade only once the price passes a certain level.
For example, Bitcoin costs $100,000. A trader buys it and places a sell stop at $95,000. If the price falls to $95,000, the order is activated. Another trader places a buy stop at $105,000. If the price rises to that level, they will buy Bitcoin. If not, there will be no trade.
Once triggered, a stop order turns into a market or limit order. A stop-market order will be filled at the first available price, which can differ significantly from the stop price in a sharp move. A stop-limit order will be filled only at a price no worse than the one specified, but may not be filled at all if the price has moved further.
The main risk of stop orders is false confidence that price movements can be predicted. A short spike can trigger a stop, after which the price returns. The example of December 2017 shows this well. At the start of the month, Bitcoin cost about $10,000, and on 17 December almost $20,000. Many people were sure the rise would continue. But a year later, in December 2018, the price fell to about $3,200. Stop orders help you set the terms of a trade in advance, but they do not make a forecast more accurate.
