Trading on the exchange comes down to placing your own and to satisfy other people's orders (orders) to buy / sell cryptocurrency. At first glance, the process may seem simple, but there are many subtleties in trading itself. One of them is the different types of trade orders, which we will now consider.
Why are there different types of orders?
Order types exist so that a trader who submits a request to buy or sell assets retains some control over his order after entering the market. That is, a person who buys or sells stocks, commodities or currencies can insert many other smaller instructions into one simple instruction.
In trading in cryptocurrencies or other assets, all orders on exchanges are divided into several categories, depending on the conditions for their execution. Very often, additional instructions can be attached to orders, their parameters, execution time and much more can be changed.
Once on the American Nasdaq exchange, there were 136 order types developed by PhDs who specialized in various aspects of high-frequency trading. However, all this variety was built on the basis of only two basic orders - limit and market.
Understanding how different orders work is the basis of trading on the exchange.
What is a Market Order?
A market order is essentially the most basic form of a trader's order and is an indication to buy or sell an asset at the best price currently available.
If you go to the exchange and want to buy something right now, you contact the seller with the best available price and make a deal. Common among beginners, this type of order is often considered the simplest. It can be useful when you just want to quickly enter or exit a position with sufficient liquidity.
Please note that users who place market orders are considered "takers" as these orders instantly match and as a result "take" liquidity from the order book (general order book). On the other side of the deal are the makers - we'll talk about them right now.
What is a limit order?
A limit order sets a specific price at which a trader wants to buy or sell an asset. The order is executed only if the market price of the asset reaches the level specified by the trader.
While market orders are executed immediately, limit orders are executed at a predetermined price, which is generally better than the current market price.
EXAMPLE: You think the value of Bitcoin is about to go down. The execution of a limit order will allow you to set the execution price, for example, $ 500 below the current market price by submitting the order to the order book or order book. If BTC drops to this price, then the limit order will be executed and the trade will be executed at your desired price.
This process allows traders to set limits and control their risks.
This way traders know that their price caps are in place and that they will not have to constantly watch the market in order to make trades. The reason that limit orders are treated as "market makers", lies in the fact that they are placed in exchange glass that literally "makes" the market.
What is a stop order (stop loss)?
Stop orders are similar to limit orders, with some differences. The trader's limit order is placed immediately and executed after a certain price is reached. A stop order is placed only when a certain price is reached. It can be paired with a market or limit order.
That is, the key difference is that limit orders are already placed in the order book and anyone can see them, while stop orders are "invisible" until certain conditions are met. With the help of a stop order, you can set a pending execution of a market or limit order, which gives the trader flexibility in trading.
Interesting combinations turn out. For example, if you place a market sell stop order after the asset reaches a certain price, it will immediately be sold at the best price when the conditions are met. Limit stop order allows you to place a limit order if the market price of an asset reaches a certain level.
EXAMPLE 1: You are expecting Bitcoin to grow to $ 10,000 and want to buy it at that price, but only if BTC crosses the line itself. You place a market stop order that immediately buys the cryptocurrency when the pre-set conditions are met.
EXAMPLE 2: Again, you are expecting a rise to $ 10,000 again and are confident that after crossing this line, active Bitcoin trading will begin. However, you are only willing to purchase it for $ 10,100. That is, to execute this scenario, you need to set a limit stop order. In this case, after reaching the threshold of 10 thousand dollars, a limit order for the purchase of cryptocurrency at a price of 10 100 dollars will be placed in the order book.
Stop orders give us flexible tools to implement different strategies. In the example above, you could immediately buy Bitcoin at $ 10,100, however, you had no guarantees that the cryptocurrency would necessarily cross the $ 10,000 line in the future.
What is a scalable order?
Scalable orders use multiple limit orders to buy or sell incrementally. This can help to average out the impact of market fluctuations over time, as well as mitigate the effect caused by a large order.
Sometimes a trader wants to make several small trades at different prices. There may be several reasons for this, one of which is averaging, that is, buying an asset from time to time in the wake of its rise or fall. Averaging is often used as a strategy to minimize risks while maintaining optimal returns.
Another reason is to hide a large sell or buy order in case a trader needs to sell a huge amount of cryptocurrency. This is done to minimize the impact on the market. Large orders can not only have a significant impact on the market by moving the price, but also serve as a psychological trigger for other traders.
To avoid this, a massive buy or sell can be split, for example, into ten smaller orders placed in a range of price levels. And for the most part, it will look like normal order-book activity.
What are time-in-force instructions?
On stock exchanges, this phrase can be found quite often. This is a parameter that determines the time the order remains in the order book. If it is not satisfied, the application will be canceled.
It is useful to set the "in action" parameter so as not to forget about old orders. For example, a trader can leave his request to buy or sell a cryptocurrency a few weeks ago and forget about it. If, in the new market environment, the execution of the order is undesirable, it will incur losses. In this case, the time-in-force parameter comes to the rescue.
The simplest variant of the parameter is “good till canceled”, which leaves the order in the order book until the trader cancels it. It is usually set by default for all trades. There are also “immediate-or-cancel” orders that are automatically canceled if they cannot be executed as soon as they enter the order book. Likewise, the "fill-or-kill" option cancels the order if it is not completely satisfied by another market participant after being placed in the order book.
What is a passive order?
The last type of parameters that can be built into the order logic is the "post-only" option. It allows you to make sure that the order is placed if and only if it cannot be executed immediately.
If a buy (or sell) order immediately matches the opposite order, a trade occurs. In many cases, the trader does not want to place an order if it is immediately satisfied by another market participant, that is, the trader wants to avoid paying commissions when placing limit orders. This is due to the nature of the makers and takers that we talked about earlier. Generally speaking, on exchanges, limit orders will be subject to significantly lower fees than when placing market orders, since they provide liquidity.
So the conclusion is obvious: cryptocurrency traders have enough tools to work in the market. Novice players should understand them properly before using them. Otherwise, you may not take into account some important feature and lose your deposit.