In order to carry out trades in cryptocurrency marketplaces, order types are vital in ensuring that they carry out trades successfully. Irrespective of whether it is a buy or sell order, choosing the right order option is pivotal in ensuring the success of the trade. This is because the right order type increases success rate, assists in risk management, ensures all trading profits are secured, and facilitates trade automation.
In the following article, we are going to discuss the order types and their respective functions in crypto trading.
Market Orders
What is a Market Order?
A Market order is the simplest and most popular order option. It is an order for buying or selling of cryptocurrency at the going market rate, immediately.
How It Works
Market orders are executed in real-time with the prices that are currently in the market. This means, that buying and selling is done at the currently available positions.
When to Use
Best for Demand and Supply Zones: When execution speed is paramount, and you are indifferent to price volatility at that moment, the market order tends to outshine.
High Turnover: In situations of heightened liquidity, market orders are executed well in a liquid environment.
Pros
- Market orders are executed and delivered in real-time with the available pricing.
- Use of this order type is easy.
Cons
- Slippage: In fast-moving markets, there may be a discrepancy in the price you pay and the price you viewed while placing the order.
Limit Orders
What is a Limit Order?
A limit order is an order to either buy or sell a cryptocurrency at a certain price or better. This indicates that your order will be filled only if the market price matches your specified price or better.
How It Works
By placing a limit order, you set a price at which you wish to buy or sell. The order will only be executed if the market price is in your favor. For example, if Bitcoin is selling at $40,000 and you are willing to buy at $39,500, your limit order will only be executed when the price reaches $39,500 or lower.
When to Use
Ability to choose the price: This is effective when you want to manage the price at which you buy or sell an asset.
Less competition: Use limit orders when there is no need to buy or sell instantly.
Pros
- You always buy and sell at your intended price.
- Prevent buying at inflated rates and selling at deflated rates.
Cons
- Your order could remain unfilled if the market doesn’t hit your chosen level.
- Execution could take time in thinly traded markets.
Stop-Loss Orders
What is a Stop-Loss Order?
A stop-loss order automatically sells a cryptocurrency after a specific loss threshold is reached. It is a risk management strategy aimed at minimizing losses.
How It Works
When you make a stop-loss order, you set a specific price where your asset will be sold if its price declines. For instance, buying Bitcoin at $40,000, setting a stop-loss at $39,000. The system will sell your Bitcoin at $39,000 or above.
When to Use
Risk Protection: If you anticipate large losses, stop-loss orders give you the ability to limit risks in highly volatile markets.
Hands-Off Trading: For users that are unable to actively manage their trades, stop-loss orders set a net to catch losses.
Pros
- Mitigates the risk of losses.
- Eliminates emotional decision-making in executing trades.
Cons
- Premature Sell: Stop-loss orders are sensitive to price fluctuations, and in volatile markets, they can trigger unnecessarily during a dip causing loss of assets.
- Slippage: If the market price drops significantly, your stop-loss could be executed at a price lower than what you set.
Take Profit Orders
What a Take Profit Order Is
A Take Profit Order is an order set to automatically sell a cryptocurrency at a certain price to maximize profit. It is designed to get the profit when the price reaches a specified level.
Its Functioning
With take profit orders, you sell the asset at a specified price to guarantee specific profit. To illustrate, if you purchased a Bitcoin at $40,000 and set a take profit order of $45,000, the order will sell your Bitcoin if the price hits $45,000.
When to Implement It
Locking Profits: Take profit orders are notably effective when a price target is reached, securing gains for the trader.
Avoiding Emotional Decisions: By automating the process, you eliminate the desire to prolong the trade in hopes for larger profits, which could lead to lower chances in trading.
Advantages
- Removes the need of continuous supervision for the achievement of specific profits.
- Eliminates emotionally charged decision-making from trading.
Disadvantages
- With the executed stop-loss, you are unable to profit further from the increase in price, thus losing additional profit.
Stop-Limit Orders
What is a Stop-Limit Order?
A stop-limit order is a blend of a stop-loss order and a limit order. At a specified stop price, the order is activated but will only be filled at the limit price set or a more favorable price.
How It Works
A stop-limit order requires a stop price and a limit price. Once the stop price is reached, the order is activated but will only execute at or better than the limit price. Let’s say you set a stop price of $39,500 and a limit of $39,200. The order becomes a limit order at $39,500 but will only execute at $39,200 or better.
When to Use
Better Control Over Stop-Loss Execution: Provides better control than a standard stop-loss because you can set a limit of your choosing to exit the trade.
Avoid Slippage: It works well for avoiding slippage associated with a stop-loss order.
Pros
- Better control of trade execution.
- Less chances of slippage.
Cons
- If the price does not reach your specified limit, your order will not execute.
Conclusion
Knowing the various order types is critical for successful trading. Here’s a recap for you.
Market Orders: You can use these when you need to get the most competitive price as fast as possible.
Limit Orders: You use these when you want to set a particular price for a buy or sell order.
Stop-Loss Orders: Sells to limit losses at a specified price level.
Take-Profit Orders: Sells automatically when the price equals a pre-specified profit level.
Stop-Limit Orders: These are a combination of both stop-loss and limit orders, giving you better control on the execution of the order.
Knowing what order types to use will improve how you manage risks, retain profits, and automate the tedious work of trading to ease the strain of crypto trading.
FAQs: Order Types in Crypto Trading
Q1: What is the difference between a market order and limit order?
A market order is executed as fast as possible and at the most competitive price. A limit order will only execute once the price hits a level you provided.
Q2: When should I use a stop-loss order?
Put a stop-loss order in place when you want to restrict losses, particularly in fast-moving markets.
Q3: How does a take-profit order work?
A take-profit order will sell a cryptocurrency automatically at a predetermined price level that is above the purchase price, capturing profits at that point.
Q4: What’s the benefit of a stop-limit order?
The benefit of a stop-limit order is that control is given at how much the order will be executed, making slippage much lower than a market order.
Q5: Can I use these orders on mobile?
These orders can be placed on mobile devices, as all major cryptocurrency exchanges, like Coinbase, Binance, and Kraken, have mobile applications that allow market, limit, stop-loss, and take-profit orders.
