Trading quick or trading right—that’s crypto trading for you in a nutshell. With this basic understanding in place, choosing the right order type can help you enter the market with confidence.
If we were to zoom out a bit, trading in any high-beta asset class (stocks or crypto) requires some trading levels. The levels include the price at which you enter or exit the asset, gaining a profit or incurring a loss in the process. Reaching those levels requires you to place a certain type of order: Limit order, market order, or even a stop order. This article would focus on the first two. Let’s dig in.
What is order limit?
An order limit is exactly what it reads. It means setting a predetermined level for buying (selling) an asset, and once the price reaches or breaches that level, the order gets executed. That’s it!
If you are a trader, you might still have your questions. If a crypto I bought is currently trading at $30, can I place a sell order limit for $50 and wait for it to get executed?
Well, that’s a toughie! And the answer is yes, you can. But not in a way you think.
Let’s understand this better:
In crypto, there is no inventory. The market comprises buyers and sellers constantly trying to outbid each other to buy low or sell high. And there are hundreds and thousands of them, working in the narrowest possible price range.
Therefore, if a crypto is trading at $30 (as in the example cited above), an order limit of $50 might not be executed instantly. It would require a really long wait.
So why wait and keep an order limit active? You can always place a market order to sell once the price reaches $50. Well, what is a market order now?
Limit order vs. Market order
A market order, unlike a limit order, is the trading level that is aligned with an open market. Consider it to be the current price of the crypto mentioned above.
While a market order differs from a limit order in terms of price identification, here are some of the other distinguishing features.
|Limit order||Market order|
|Executes at a specified price||Executes at the current (market) price|
|Harder to execute; more so for less-liquid assets||Higher chances of getting executed instantly|
|Primary goal is to get hold of the best trade||Primary goal is to execute the trade|
|Great for daily traders (swing and intraday)||Great for long-term investors and HODLers who do not care about granular price points|
|Might need some ‘Timing the Market’ experience||Easy to initiate|
|Some platforms let you place ‘Day Only’ and *Good ‘til canceled orders||Best initiated anytime as the crypto market never sleeps|
*Good ‘til canceled (GTC) is an order that remains active till the order is executed or the trader cancels it. We hope the explanation would help you make your choice between market orders and limit orders. Read on to know how these orders work, practically speaking.
When should you choose a limit order?
If you are a quick buy-sell trader who wants to time the market and make the most of price fluctuations, a limit order would make sense.
We would make it clear with the help of the following example.
Imagine you are looking at BTC, which at the time of writing, is trading at $22,887. As a trader, you think that within a few days, BTC might even reach $24,000 (a hypothesis). In this case, you would be tempted to purchase some at the lowest level, say $22,500, especially on a day when it might correct further.
In short, you would need to choose a limit order if you wish to purchase BTC at $22,500 when it is currently trading at $22,887.
Note: Some preemptive technical analysis might be required to understand the price movements. For that, check out our blog on Technical Analysis.
How and when to place a limit order?
The process is simple: head over to the Buy-Sell page of the crypto exchange/aggregator you trust (preferably CoinSwitch). Hit ‘Buy,’ enter the desired amount, and select the order type (choose between Instant, Limit, and SIP, if you are using the CoinSwitch app).
As for the when (timing), place a limit order if you are reasonably sure that the price will hit the predefined level.
Buy and sell limit orders: How are they different?
Buy limit orders are the ones where you place the order value lower than the current price (preferably at a support zone), in order to grab the crypto of your choice at a bargain. Similarly, a sell limit order is the one where you place the order higher than the current price (preferably at the resistance zone), hoping to exit the holding with a profit.
What are the benefits of a limit order?
- A limit order (if executed) lets you buy (sell) cryptos at the preferred price or even better.
- Limit orders can be modified depending on your understanding of the market.
- Far-fetched limit orders allow you to reconsider investments and make changes in response to sudden volatility.
You might have your doubts still: How can I get a better buy/sell price if the order is supposed to be executed at a particular level?
Here is the answer:
Imagine you want to sell a crypto named ‘You’ for $50—10 tokens, to be precise. We are presuming that your investment has already fetched you a profit. You place the sell order limit at $50, waiting for the order to get executed. Suddenly, the market sentiment turns in favor of the token (Maybe moved by a tweet from Elon Musk), and the price shoots well past $50, say $55. This way, your order will be executed at a higher price ($55), helping you profit some more.
To elaborate a bit, the difference in the limit order and sell price is called the price gap. It is common in the equity market, where the market is open for a specific period of time. The crypto market never sleeps. Yet, for some less-liquid cryptos (where buying and selling action can be tepid for a while), better prices can be achieved using limit orders.
What are the risks of limit order?
Limit orders are good trading tools if you have a knack for following the market closely. In case you are a lazy bird who checks out the crypto market once in a while, limit orders can come with the following risks:
- They can get executed in a volatile market even before you can think of revisiting the levels.
- Most limit orders are only good for a day (unless you opt for the Good ‘til canceled orders).
- They might not get executed in an unsteady market that keeps moving sideways.
Both market and limit orders have their place in crypto trading. While one helps you ride the wave, the other allows you to make that perfect buy or sell. Yet, at the end of the day, it is all about your preference, long- or short-term vision, and the willingness to follow (not follow) the market.