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Trading Order Types Explained
Table of Contents
The order type refers to the conditional instructions embedded in the order request. It explains how and when the crypto orders must be executed. By setting up conditions to either buy or sell, a certain degree of emotion is removed from the process, enabling a more objective approach to trading.
Market, Limit, and Stop orders
Before we begin, we need to understand that all order types covered in the article fall under one of the following categories:
- Market order
- Limit order
- Stop order
A Market order is a type of Buy and Sell order that is executed immediately at current market prices.
A Limit order is a type of Buy and Sell order executed at future market prices when the asset reaches a minimum price specified in the order.
A Stop order is a type of Buy and Sell order executed at the exact price specified in the order.
For example, a seller may have placed a sell limit order for Litecoin at $200 per unit. Meaning, the order is supposed to be executed only when the market price of Litecoin is at least $200.
When another trader places a market order to buy Litecoin at market price ($200 per unit), the market order will be matched with the limit order.
A crypto order book stores all the limit orders placed by traders. As soon as conditions specified in an order type are met, the transaction will be canceled or executed accordingly.
Major crypto order types
These 4 strategies are some of the most fundamental orders types:
- Buy market order
- Sell market order
- Buy limit order
- Sell limit order
Using these orders will help you buy/sell crypto-assets either immediately or when the price reaches a specified limit. However, the crypto market does not necessarily move only in only four directions.
Traders need to exercise more control over when and how the transactions take place. Therefore, you have to consider the following types of advanced crypto order types.
Stop-loss orders prevent potential losses that occur while trading. You can place an off-book request on the trading platform to sell an asset when it reaches a specific price through this order type. Since the instruction does not become a part of the order book, the trading platform will have to watch for its price and create a market order.
Stop-limit orders prevent market loss by creating a limit order when the price reaches a preset value called stop price.
When the asset reaches the stop price, the trading platform will trigger the limit order. Now, the trading platform will observe if the asset’s price recovers to the preset limit. If this recovery happens, the trading platform will sell your investments.
In this type of order, you can combine two order instructions. For example, the first instruction could buy an asset if its value drops below a certain price point. Similarly, the second instruction could sell an asset if its value climbs to a specific price point. Traders use this order type to automate their trading process.
This order type consists of multiple limit orders to sell or buy the crypto-asset. Traders use this order type to prevent the impact that massive orders have on the market. More importantly, by setting up limit orders are frequent intervals, traders can benefit from the value changes. A buy scale order will set limit orders at decreasing prices. On the other hand, a sell scale order will limit orders at increasing prices.
Time-in-force instructions are not an order type. It is a set of tools used to modify a limit order based on time constraints. There are a few order types within this domain that help traders automate trading:
For instance, Immediate Or Cancel Order (IOC) will cancel parts of the orders that cannot be executed immediately.
On the other hand, Good ‘Til Canceled (GTC) will keep the order open until it is executed or cancelled by the trader.
Meanwhile, Fill-Or-Kill (FOK) cancels the entire order that cannot be executed immediately and completely.
Understanding the different order types and using them strategically can help you avoid market losses. More importantly, if you can design a set of orders and instructions based on market data, you can achieve impressive profits.
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