Crypto exchanges order types explained
Like traditional financial markets, cryptocurrency exchanges offer many different ways to place an order to buy and sell an asset. In this article, we will tell you how to use these orders.
Traders have access to a variety of tools that help ease the process of trading and protect themselves against unexpected losses. In this article, we will review three main order types – market, limit, and stop order.
A market order is an order to exchange cryptocurrencies at the best available price on the given exchange. Often this means the execution of a trade at a current price. If at the time of placing a market order, Bitcoin is trading at $22,700, the trader will buy it at $22,700.
A market order is the easiest and fastest way to buy or sell an asset on a trading platform. All you have to do is to enter how much crypto you want to buy or sell, and the exchange will find suitable open orders in the order book.
Since the trader draws liquidity from the order book during the execution of a market order, he will pay a taker fee. It is significantly higher than the maker fee paid by traders who place limit orders.
A limit order facilitates buying or selling crypto at the price set by the trader. In this case, they have to enter not only the number of coins but also the exact price of the transaction.
At the time of writing, Bitcoin is trading at around $22,700. If a trader thinks that BTC could drop to $18,000 and start recovering from that level, he can place a buy limit order at $18,000. His order will only work if the price of bitcoin reaches $18,000.
The advantage of the limit order is that users can trade without having to monitor the market around the clock. In addition, such orders pay a lower maker commission in case it is not executed immediately after placement.
The disadvantage of limit orders is that if the asset does not reach the specific price, it will not be executed.
A stop loss order is an order to close the active trade if the price reaches a certain level. When using a stop-loss order, the trader sets the price level on which he wants to sell the asset to avoid further depreciation and limit the losses.
Let's say, a trader bought bitcoin for $20,000. He is confident that the price will go higher, however, he does not want to sit in the red in case of a decline. At this point, he places a stop-loss near (or below) the support levels to limit losses if the price direction changes to the negative side.
The main advantage of a stop loss as with limit orders is that investors do not need to constantly monitor the charts. Traders can be sure that the exchange will automatically fill their sell order if the stop-loss price is reached.
The main SL disadvantage is that short-term price fluctuations may activate the stop-loss, thereby closing a deal. In practice, quite often a situation occurs when a deal is closed by a stop-loss order, after which the price reverses and goes to the desired levels. This happens because whales are hunting for accumulations of stop orders and profit from sharp price declines. We will talk about that more in our next article.