One of the most lucrative financial endeavors in fintech today is trading cryptocurrencies. It can be extremely volatile, so understanding the trading tools available may aid investors in making wiser and less risky choices.
This article provides a review of the various order types used in cryptocurrency trading, which have similarities
to the order types used in stock trading but may be used differently due to the unique structure and circumstances of the cryptocurrency market.
Due to the growth of unregulated and risky companies in the beginning stages of cryptocurrency, exchanges were often referred to as the “wild west,” which pinnacled in the notorious MtGox hack of 2014.
There were few dangerous activities for trading Bitcoin (BTC) for fiat money or physical products after Satoshi Nakamoto released the cryptocurrency in 2009. Peer-to-peer (P2P) trading would predominate(P2P) via the well-liked Bitcoin forum Bitcointalk.
These were risky activities, but Bitcoin was worth almost nothing at the time, making it unnecessary to put much money on the line compared to today.
By complying with extremely strict Know Your Customer (KYC), Anti-Money Laundering (AML), and Counter-Terrorism Financial (CTF) laws, highly regulated and more trustworthy exchanges have taken over the crypto scene worldwide even after twelve years.
With exchanges transacting more than $50 billion in trades every day, the cryptocurrency exchange market is now valued in billions of dollars.
In the modern era, cryptocurrency exchanges contest to provide traders with a variety of tools to help them decide on the best trading strategy to maximize gains and minimize losses.
With the development of the internet and computerized systems, regular retail traders in the cryptocurrency market can now handle orders very easily while maintaining complete control over their buying and selling activity.
The days when trading involved several steps and procedures that could take hours or even days to complete are long gone.
Before looking over the various order types available on cryptocurrency exchanges, we take a look at the order books that determine order visibility and market position.
What is an exchange order book?
A list of active buy (bids) and sell (asks) open orders for a particular trading pair is known as an order book. It can be recognized as a marketplace where anyone can participate by putting in a bid for an asset they want to purchase or asking for a price for one they want to sell.
The open order remains in the order book until it is removed, someone accepts the offer, or in the case of a sale, someone accepts to pay the asking price for the particular asset.Trading pairs like BTC/USD or BTC/Ether (ETH) will have their order book.
What kinds of crypto orders are most common?
Trades can be made with a variety of order kinds using cryptocurrencies with a great deal of flexibility, whether they want to specify the period of the transaction or target a particular selling or buying price.
Orders can exist in a futures market where contracts may specify that an order will be carried out at a future date, or in a spot market where cryptocurrencies are exchanged for instant execution.
Stop orders allow traders to specify the price at which the order should be filled and are typically configured to limit losses if the cost of a commodity falls sharply.
Market orders
Pros
Cryptocurrency market orders are ideal for traders who do not want to wait for a target price because they are guaranteed to be fulfilled, as opposed to other kinds of orders, which depend mostly on the possibility that a price will reach the target.
The order book loses liquidity when a crypto market order immediately corresponds to the best existing limit order. As a result, it is regarded as a taker order, and that is why exchanges typically impose market fees and request more money. Unlike limit and stop orders, market orders cannot be withdrawn because they are immediately executed.
Cons
Slippage is a major flaw in market transactions. Large market orders that frequently match numerous orders in the order book are indicative of this situation and may be vulnerable to detrimental changes in price. Slippage, to put it simply, is when an order is filled at a lower price than anticipated.
When this occurs, it generally means that there isn’t sufficient liquidity to complete a sizable order at the desired price, instead, the next lower price will step in. A price difference may not even be apparent if the purchase value is not very large. Slippage, however, may be a significant problem if the trade is large.
In cryptocurrency markets, exchange liquidity can be a real problem, leading many experts to suspect that some volumes stated may be inflated or fabricated.
In general, traders who want more control over their trading approach may think about using limit orders.
Limit orders
An instruction to purchase or sell a cryptocurrency only at a predetermined price is known as a crypto limit order. The trader who can wait patiently for the price objective to be achieved is the one who should use it.
Illustration of a limit order
Pros
Limit orders for cryptocurrencies offer greater versatility
with regard to price and quantity than market orders do. They enable traders to establish a minimum price and only operate at that price or higher.
Investors will be able to either make an open order that may be fulfilled by another trader or accept another trader’s open order on the exchange.
The flexibility of limit orders’ enables traders to better manage and reduce risk while giving them the choice to forgo trading altogether, from continuous market observation.
Cons
Only when the specified price is reached are limit orders fulfilled; even then, implementation is not guaranteed, and there is a possibility that they may even be partially filled. Orders are placed in order of price, followed by first-come, first-serve. As a result, even after the price is reached, the purchase might not be filled because there are still open orders for the same amount.
Setting the limit price slightly above the price at which units were sold or below the purchasing price of psychological levels is a good practice. Looking at the order books can help you identify prices that don’t represent market conditions, as others may employ this strategy as well as many instructions to increase the likelihood of carrying them out.
Limit orders are regarded as “makers” because they instantly add open orders to the order book, which adds liquidity to the market.
Limit order versus Stop order
A stop order contains a stop price intended only to initiate an actual order when the specified price has been obtained, which distinguishes it from a limit order. A limit order can also be seen by the market, whereas a stop order cannot be seen until it is activated.
Stop order
Once a cryptocurrency reaches the stop price, a stop order is set to purchase or sell it at the current market price. The order then changes to a market order and is fulfilled at the next market price.
This type of order aids traders in preserving gains and minimizing losses. Even if the price goal is reached, they might not execute, just like limit orders.
Market or limit orders may be used as stop orders. Immediate execution is guaranteed by a stop market order, which is predicated on the assumption that the price will reach a specified target (the stop price). Stop-limit orders are a little more intricate and call for a more thorough description, which we are giving here.
limit purchases
Stop-limit orders
A sophisticated type of order is a crypto stop-limit order. To reduce risk, it combines a stop order and a limit order. Stop-limit orders are frequently used by traders to protect gains or restrict losses.
A stop-limit order includes two layers of prices and is not immediately executed:
- The order is changed into a purchase or sell order by a stop price;
- A limit price stipulates the maximum amount at which traders are ready to spend for a cryptocurrency purchase or their lowest eager price in the event of a sale.
Limit orders and stop-limit orders are identical, but stop-limit orders give the trader even more flexibility.
When the stop price has been achieved, a stop-limit order essentially buys or sells the cryptocurrency, and the trading activity proceeds until the entire order is filled. The advantage of setting a stop price is that it prevents the order from being filled at a lower price, giving traders more authority over how their order is carried out on the market.
For instance, a stop price to purchase Bitcoin is set at $80,000, and this price will cause the order to be filled. If the investor thinks the price may rise, they can establish a maximum limit price of $80,100, which will be the highest price at which the asset can be purchased. Once a trader has determined the highest acceptable price, they can regulate the price that they pay by using a stop-limit purchase.
In a similar vein, consider $70,000 as the limit price for selling Bitcoin. If the trader believes the price might drop substantially he can establish a minimum allowable price of $69,500, which will be the lowest price the asset is going to be sold for to prevent outrageous losses. This will be the price at which the sell order will be triggered.
Pros
Traders can specify the lowest price they are prepared to accept from a buyer using a stop-limit sell order. The balance that remains is then placed as an open order at a cost of $69,500 if the full order isn’t filled.
Because they help manage the high instability that characterizes cryptocurrency markets, stop-limit orders are particularly effective in reducing risks for traders.
Cons
Stop-limit orders are not added to the order book immediately like limit orders are. In actuality, the purchase won’t be entered into the order book and made public until a predetermined price is reached. Stop-limit orders may not execute or may fill only partly, just like limit orders.
Stop-loss orders
Because it instantly closes a position when the price hits a specific level, a cryptocurrency stop-loss order is a crucial tool in risk management.
Pros
Stop-loss orders are advantageous in the extremely volatile cryptocurrency market, much like stop-limit orders.
They can be especially effective in assisting with managing a cryptocurrency portfolio, particularly for day-trading activities, as they give traders the chance to concentrate on something other than their monitors. They have two price layers, a stop price, and a loss price, just like stop-limit orders.
The stop price can be set at $80,000 and the loss at $79,500 to limit a loss, for instance, if traders want to sell a cryptocurrency and the trends situation is bearish, which means that the price appears to be moving down significantly.
Depending on whether the market is moving up or down, professional traders usually move the stop loss higher or lower. Establishing a trading management framework that reflects the market’s behavior will aid traders in limiting loss damages.
Cons
The drawback of stop-loss orders is that they immediately lock their balances, preventing them from being used for any other orders or transactions. This problem might be avoided by designating some funds to the stop-loss order and others to other activities.
Additionally, stop-loss orders are susceptible to slippage just like market orders because they are not guaranteed to be fully fulfilled when the market order is activated.
What is the time in force for orders?
The amount of time a crypto order will be in effect before it is executed or expires is specified by the time in force command. Especially if they use crucial trading indicators like moving averages, which are extremely time-sensitive, traders can be consistent with the structures and forecasts of the cryptocurrency market by setting up an order following specific time limits.
Type of time in force orders
- GTC: Good ‘til canceled (GTC): This bitcoin transaction will be entered into the order book and held there until it is carried out or withdrawn.
- Immediate or cancel (IOC): Crypto traders can place this order for instant execution using the immediate or cancel (IOC) option. It will be promptly terminated and eliminated from the order book if it is not immediately filled. This kind of order lets a trader designate a minimum quantity that will be filled right away; any additional quantity that isn’t filled will be immediately canceled.
- The fill or kill (FOC): in contrast to the earlier IOC order, this states that the cryptocurrency order will only be filled if the entire amount can be matched. It will be immediately canceled if that doesn’t happen.
Crypto traders that are against a partial fill if it leaves them with a too small position on an asset should use this form of order. The system cancels the purchase in its entirety if the entire order is not immediately filled by the market.
Use the Orders yourself.
You must be knowledgeable about the following if you want to quickly engage in cryptocurrency or make trading cryptocurrency a regular part of your life, as the above-mentioned order categories are the most common. You will find it simple to look into all of the order possibilities offered by exchanges if you are familiar with these basics.
