Now that Bitcoin and other altcoins are accessible on investment markets shoulder-to-shoulder with stocks, indices, ETFs, and precious metals, we tend to identify crypto exchanges through the features of traditional trading platforms.
However, while traditional platforms finish their job after facilitating the trade, crypto exchanges go further and continue to serve as brokers during the transaction and as custodians after the transaction.
Despite these notable differences, you should know that all crypto exchanges are built on the very same operating mechanism as other trading platforms, known as the order-matching engine. This complex software system collects and synchronises all submitted ask and bid orders to match two opposite orders based on their purpose, pricing, and time of placement. Once the engine algorithms find a correlation between two orders, the platform shows the deal to the user, who can take advantage of these algorithms and place a market, limit, or other, more complex orders.
In this article, we’ll go through the majority of order types you can find on well-established crypto exchanges and discuss how the differences between them can affect the flow and outcome of your trade.
What Are Market Orders?
A market order allows you to buy or sell a specified amount of cryptocurrencies immediately after the order’s placement. The purpose of market orders is to enable traders to enter or leave a position promptly, regardless of the execution price.
Market orders are considered as a basic order type, and they’re usually displayed as the default choice on the pop-up window when you adjust the settings of your trade. Placing a market order ensures a guaranteed execution at the current rate available on the exchange’s order book, but it doesn’t safeguard a favourable price.
For instance, you believe that investing in a certain coin is a lucrative investment plan in the long run and you’re strongly determined to buy it. At that point, you won’t focus on its market price but submit a market order instead — which will be processed rapidly and executed at approximately the current price.
The opposite scenario case is also possible when placing a market order. Let’s say you’ve been holding a certain cryptocurrency for quite a long time. Its price keeps declining, and you’ve already lost faith that it will ever rebound. Thus, it’s more practical for you to get rid of the crypto at any expense instead of waiting for a distant-future profit. Accordingly, you’ll submit a market order to sell all your coins.
Advantages and Disadvantages
The greatest benefit of a market order is that your crypto exchange can execute it in a time-efficient manner as you’re sending a signal to the OME to execute the transaction for the best price available at that moment. For buyers, this means accepting the seller’s offered price, while for sellers, it means going for the price the buyer is bidding.
Market orders, however, come with a huge downside, which is the lack of possibility to specify a price. This can lead to a huge gap between the bid price and ask price — known as bid-ask spread — and hence, a negative outcome for the trader. The crypto industry is an extremely volatile market, so the price of your asset can change right before submitting the order. Eventually, this will result in paying considerably more or receiving ridiculously less than planned. Fortunately, today’s crypto and stock markets offer users a range of interactive tools and automatic financial calculators to estimate the spread.
Finally, there is another potential risk related to unfavourable settlements, typical of low liquid cryptocurrencies. Namely, if you submit a high-scale market order, it can influence the overall market price in both directions simply because the algorithm won’t be able to detect enough suitable counterparts at that point to match the order. It’s very likely for your large order to be divided into smaller pieces, i.e. executed separately at a given time and price. Expectedly, you’ll end up with a considerably different price from the one you settled for a few moments before. This negative market effect is called slippage.
What Are Limit Orders?
When placing a limit order, you actually specify an optimal price at which you wish your trade to be executed. If you enter the trade from a buyer position, it means that you’ll accept the limit-order price and everything below, while sellers will take nothing but the sum above the specified price.
Generally, you can adjust the limit orders to be valid for up to three months after submitting them, which will give you enough space and comfort to get your requested price. Some trading platforms allow you to set an expiration date or keep the order open indefinitely until you manually close it, called a good-til-cancelled (GTC) order.
For example, you’ve been carefully following a “rising” coin with a current exchange rate of $100 per unit, but you can sense that it’ll hit a higher value very soon. In this case, you’ll be certainly tempted to place a market order and buy a considerable amount of this coin immediately. Instead, you can “lock” the target price of $100 by placing a buy-limit order as it’s very, very likely it can rise on the spur of the moment. In some way, you protect yourself against an unnecessary overpay due to momentary shifts. If the trade doesn’t get executed, you can always place a new one or, eventually, go for a market order.
Similarly, if you’re planning to sell a certain amount of cryptocurrencies whose price doesn’t seem to be going any further, you can set a sell-limit order by specifying the current value as a minimum to make sure that you won’t accept anything less in exchange for your assets.
Advantages and Disadvantages
A clear advantage of limit orders is that you get to specify your desired price. Your order will be filled only if the coin reaches that price or even a better price. Moreover, a strictly-defined price can reduce the bid-ask spread to an insignificant level.
However, a limit order might never execute due to a sudden decline or spike of the coin price depending on various factors that define the market. Liquidity is also a concerning factor with limit orders. Even if the coin reaches the specified price, the crypto exchange may not be able to provide enough funds to fill the order or, in other words, find a suitable match to respond to that order.
Finally, three months can be an era measured in crypto-time. It’s quite possible for the selected coin to move in an unexpected direction or hit a much higher price only a short time after you got your order placed.
Other Types of Basic Orders
Stop-loss and take-profit orders are options you can see on many crypto exchanges tailored for beginner to medium-experienced audiences.
As its name suggests, the purpose of a stop-loss order is to limit the user’s potential loss on a certain trade. Like limit orders, you can specify a price to trigger the order known as stop price, but what it actually triggers is a market order when the specified price is reached. Thereby, with stop-loss orders, there is no guarantee that the stop price will be successfully filled as at the end of the trading day, the triggered order is a market order — hence, there is a risk of slippage.
Users often go for stop-loss orders in order to shut down their positions with an acceptable degree of loss.
The name of this order type is also descriptive enough — take-profit orders allow you to close a position in profit by selecting a trigger price called profit price. Like stop-loss orders, the take-profit order is executed as a market order after reaching a profit price. However, at its core, take-profit orders work on the same principle as limit orders: buy-take-profit are to be submitted below the current market price, while sell orders are above the available price.
Advanced and Conditional Orders
Not long ago, the opportunity for more complex orders was considered groundbreaking and a rather prestigious feature on crypto trading platforms. However, exchanges have grown immensely, so advanced orders have become a gold standard for all crypto exchanges that target pro users. These are the types of orders you can find on more advanced crypto platforms.
Take-profit-limit orders are a variety of take-profit orders used to close a position at a specified price target. However, they trigger a limit order only when the profit price is hit, and because of that, you’ll have to enter two prices — profit price and limit price.
Stop-loss-limit orders are a subtype of the stop-loss orders, but they transform into limit orders when the stop price is reached. Placing such an order also requires you to insert two amounts: stop price, which triggers the stop-limit order, and limit price, which indicates the highest buy price or the lowest sell price.
Trailing-stop orders are a type of stop-loss orders where the stop price shifts towards the market price. The stop price can be quoted as a percentage or USD amount from the current market price. Placing a trailing order will let you lock out profits and save you from manual updating of the stop-loss as your position grows.
The trailing-stop-limit order is a mix of the trailing-stop and the stop-limit order. Per its name, this order will enable you to assign the stop price in order to “trail” the current market price by a determined dollar percentage. Once the market draws back the full “trail” amount, it hits the specific price, triggering a limit order.
These entries work as conditions that make a separate order type for a more powerful effect. Conditional offers combine two basic or advanced orders — for example, when you place OCO (one-cancels-the-other), the execution of one order automatically removes the other.
When discussing order types, it’s noteworthy to mention the options that stand to a particular order and set limits on the order fulfilment.
This option gets the order executed only if it reduces the position volume or closes the position. If the reduce-only order opens a position or increases the position’s size, it’ll be immediately cancelled.
This option ensures that your order is placed on the right side of the order book — for example, your limit order is accepted as a maker order.
IOC orders have to buy or sell right away as much of the order volume as possible — at the same time — cancelling any unfilled amount.
With the fill-or-kill option, your order is either executed in total or cancelled, provided that it can’t be fully executed.
Iceberg or Hidden Orders
Iceberg orders split large-size orders into smaller and equally-divided limit orders. Each piece is exposed to the market separately over a period of time. The aim of iceberg orders is to hide the real order quantity as large-scale orders very often have an impact on the price of cryptocurrencies by their sole presence in the exchange’s order book.
A Few Words Before You Go…
You can notice that the highly-dynamic crypto market offers more than just market and limit orders, which is why we listed all other order techniques available on the best-rated crypto trading platforms today.
However, you should also be aware that all advanced orders are based on the basic order forms combining each other to provide diverse levels for professional trading.
In any case, we couldn’t favour a market over a limit order and vice versa, as each of them has a specific purpose in a given situation. In a nutshell, we can conclude that market orders are the best solution if you’re:
- Looking for a prompt execution at any cost;
- Exchanging only a small amount of crypto;
- Trading a very liquid asset with an insignificantly low bid-ask spread.
On the other hand, limit orders will be better-suited if you’re looking for a chance to specify a higher price, which can differ to a great extent from the current market conditions and the stock price. Finally, consider limit orders a better choice for trading assets with a large bid-ask spread.