Crypto Trading 101 | Order Types on Crypto Exchanges
A comprehensive review of different cryptocurrency order types and their representation on cryptocurrency exchanges.
Whether trading in the stock market or financial derivatives, orders play a vital role in sending instructions for the buy of trade. In cryptocurrency trading, too, orders signify the instructions to buy and sell cryptocurrency assets.
The order instructions, each representing a different action, are specified on cryptocurrency exchanges. While trading in cryptocurrency assets, it is important to understand cryptocurrency order types in order to minimize the chances of losses in trades.
In this guide, we take a closer look at the different types of cryptocurrency orders and how to use them to execute a specific trade.
What is a Market Order in Cryptocurrency Trading?
A market order refers to an order to buy or sell a cryptocurrency asset immediately at the current ongoing market price on an exchange. The market price is determined as the best available price for the specific asset at the time the order is placed. The order is placed at the top of the pile and will be immediately executed.
The market order is matched with the exchange’s order book. Since the prices are constantly changing, it may be possible that the complete order is executed at a slightly different rate than anticipated.
Market orders provide the benefit of instant execution of a trade, though, at the same time, a trader pays slightly higher fees for instant execution.
What is a Limit Order in Cryptocurrency Trading?
A limit order enables instructions to buy or sell a cryptocurrency asset like Bitcoin at a predetermined price.
Once a trader places the order, it goes on the cryptocurrency exchange’s order book. It will only be executed when the price of Bitcoin on the market matches your quoted price on the limit order.
Unlike market order, a limit order is not always executed immediately. It allows a trader to place a trade at their predetermined price. This prevents a trader from selling at a loss or buying at an overpaid price. However, at the same time, a limit order does not guarantee that the trade will be executed.
Cryptocurrency Order Types
Market orders and limit orders are the most basic ways to execute a trade in the cryptocurrency market. But, trading solely based on these orders restricts the trading experience.
There are cryptocurrency order types that enable executing trades with more relevant specifications to help you minimize your losses.
Stop-Loss Order
Stop-loss order facilitates a trader to control their losses in a trade.
However, unlike limit orders, it is only activated when a specific ‘stop level’ is reached. If the market price of a cryptocurrency asset reaches a stop level, then the market order to buy or market order to sell will be executed automatically.
For instance, you’ve purchased BTC at $5,000 and want to limit your losses in case the price declines. You can place a stop-loss order at $4,500 for 1 BTC. The stop-loss order will automatically be executed if the stop level price of $4,500 is reached.
However, your order may only be fulfilled at the best available price and not necessarily per your specified price.
Stop-Limit Order
The stop-limit order is a bit similar to a stop-loss order. It allows a trader to limit their losses in an open position. To enable a stop-limit order, you have to specify a stop price and a limit price.
The stop price represents the price at which your limit order is triggered. The limit price represents the price at which your order is matched.
For instance, you’ve purchased 1 BTC at $5,000. In order to minimize your losses, you have set up a stop price of $4,800 and a limit price of $4,700. If the price declines and falls down to $4,800, then your limit order is automatically placed. Your BTC will be sold if the price continues to decline at $4,700. The limit price is the least at which your trade will be executed, however, only after reaching the stop price.
Take Profit Market Order
A take-profit market order allows a trader to lock in their profits in an open position of trade. The order is activated as a market order only when the take profit price is activated.
If the cryptocurrency asset price reaches the take profit price, then your order will become a market order and will be placed on the exchange’s order book.
Take Profit Limit Order
While the stop-limit order minimizes your losses, the take-profit limit order will allow you to lock your gains of trade. To enable a take-profit limit order, you have to specify a trigger price and a limit price.
The trigger price represents the price at which your limit order is triggered. The limit price represents the best price at which your order is matched.
Trailing Stop Orders
The trailing stop orders allow a trader to secure gains in the moving price of a cryptocurrency asset.
The stop is set at a certain percentage away from the current market price. With respect to the market price moving up or down, the trailing stop will also subsequently move. This enables a trader to secure more gains as long as the market is moving in the favored direction. If the market moves in the opposite direction, then the position will automatically be closed, thereby minimizing the losses.
Cryptohopper offers a trailing feature to facilitate convenience and optimized experience in cryptocurrency trading.
Using this feature, your trading bot follows the price of an asset and will automatically take an action such as trailing stop loss, trailing stop-buy, and trailing stop-short.
One of the most popular features is a trailing-stop loss. The trading bot will automatically adjust your stop-loss when the price of an asset moves upwards. It also ensures that you incur minimum losses by closing the position if the price moves down. This allows a trader to follow an upward trend and prevent selling too early.
With Cryptohopper, a trader can also ensure the perfect buying opportunity at the sign of an uptrend. The trading bot tracks the price down and will automatically execute a buy order at the first sign of an uptrend.
Bottom Line
Researching and mastering the techniques of different cryptocurrency orders types allow a trader to access a convenient and optimized experience while trading in the cryptocurrency markets.
Moreover, these trading tools are an essential feature to minimize your losses and secure your profits while trading in cryptocurrency assets.
