Trading in financial instruments such as stocks and crypto is exciting. But before you dive in, it is important to understand different types of trading orders. Order types can be broadly defined as specific instructions on how to buy or sell crypto or stocks. In crypto trading, understanding the crypto trading order types can help new traders manage risks efficiently. Employing different trading order types for different trades can help traders maximize gains while minimizing risk.
This blog post will discuss different trading order types and how crypto traders can use these orders to devise trading strategies.
Trading Order Types
Let’s understand what is a trading order before we dig deep into different trading order types. As mentioned above, trading orders are instructions for a broker or an exchange to execute a trade on your behalf. The trade order will specify the conditions such as price and timing under which the order should be executed.
All the trade orders will be recorded in the exchange order book. An exchange order book maintains separate lists of buy and sell orders for different trading pairs.
Pairs such as BTC/USDT, BTC/ETH, etc., will have different order books. All open orders will stay in the order book until they are executed or canceled.
Now let’s dive deep into different trading order types and how they can be used with examples.
Market Orders
What are Market Orders?
A market order refers to instructions given by a trader to buy or sell a cryptocurrency at the best available price and will be executed immediately. Market orders are the simplest and the most basic type of order used in cryptocurrency trading.
When to Use Market Orders?
Market orders are executed immediately and thus are best suited for traders who do not prefer to wait for a target price. All the other order types require some patience as the execution is based on a cryptocurrency pair hitting a specific target price.
A crypto market order when placed will be matched with the limit order in the order book, removing liquidity from it. Since a market order will be executed instantly, it can’t be canceled.
While the market order gets rid of waiting time, the downside is that a trader might not get the best possible price, especially in a volatile market.
Example
A trader wants to buy Ethereum. The current market price is $3,000. A market order will be placed for 1 Ethereum. Once placed, the order will be executed almost immediately at the current market price of Ethereum, which is $3,000.
Limit Orders
What are Limit Orders?
A crypto limit order allows the trader to specify the buy or sell price. The order will be executed when the crypto reaches the specified price level. Limit orders are best suited for traders who have the patience to wait for the price target set by them for the crypto token.
When to Use Limit Orders?
A limit order gives traders flexibility with asset price and amount. It gives traders more control over trades as the order will be executed at the set price. This feature of limit orders allows traders to minimize risks and saves them the hassle of monitoring markets continuously.
The flip side of a limit order is that it will only be executed if the specific price is reached. And even if the price is reached, the order might only be partially executed. This is because orders are first ranked by price and then on a first-come, first-served basis in the order book. Therefore, a trader might miss out on a great opportunity if he is back in the queue.
Example
Let’s continue with the Ether example. A trader wants to buy Ether, but only at $2,900. He can place a limit order to buy 1 Ether at $2,900. The order will be executed if and when the price of Ether drops to $2,900 or below.
Stop Orders
What are Stop Orders?
A stop order, popularly known as a stop loss order, is used by traders to limit the losses or lock in the profits. A stop order will convert to a market order when the stop price specified in the order is reached. A stop order, which helps minimize downside risks and lock in the upside potential of trade, is used by traders to manage crypto trading risks.
When to Use Stop Orders?
Volatility is an inherent feature of the crypto market. A stop order is essential for managing risk arising from volatility in the crypto market. A trader can minimize losses by automatically selling his crypto holdings if the price falls below a specified level. Potential profits can also be locked in by selling the crypto asset when it breaches a pre-determined price level.
Example
The global crypto market is volatile. A trader bought Ether for $3,000 but is unsure about future price moves. In such a case, a stop order for $2,900 can be placed to limit the loss. The order will be executed at $2,900, preventing further losses for the trader.
Key Differences Between Market Orders, Limit Orders, and Stop Orders
Here is a tabular representation of how each order type differs from one another:
| Aspect | Market Order | Limit Order | Stop Order |
| Execution Speed | Instant | Varies | Depends on trigger price |
| Price Control | None | Precise | Trigger Price |
| Execution Price | Current Market Price | Specified price | Market Price |
| Purpose | Quick Entry/Exit | Price Control | Risk management/Entry |
| Risk | Price Uncertainty | Execution Uncertainty | Trigger Volatility/Slippage |
Conclusion
To sum up, understanding different trading order types will help crypto traders make the most of crypto market momentum, helping them manage their risks better. To recap, a market order is the simplest of order types and can be used by traders who want to execute a trade instantly. A limit order will give the trader control over the execution price, while a stop order ensures better risk management, giving the trader complete control over the execution trigger price.
