Crypto Basics Crypto Knowledge

What are Market Orders, Limit Orders and Stop Orders?

Although trading isn’t an exact science, profitable traders tend to approach each new trade in a certain calculated way. To maximize their revenue from a trade to the fullest, it’s important to identify the entry and exit price levels, as well as the appropriate order type. Order types, when used correctly, help traders achieve their goals more efficiently. The three main order types are market order, limit order and stop order

  • A trade order is an agreement to buy or sell an asset at a specific price or price range.
  • Traders have to be able to differentiate order types.
  • A market order is an order where the buyer or seller creates a trade immediately.
  • A limit order an order that is executed at a specific price or at a better price.
  • A stop order is executed when the current market price of a trade reaches a specific stop price set by the trader.

In this blog post, you will learn about the three most popular types of orders and how they work.

What is a market order and how does it work?

A market order is an order where the buyer or seller creates a trade immediately. The price at which the order is executed is at or near the current bid  (for a sell order) or ask (for a buy order) price. However an ‘instant’ market order doesn’t mean that the trade would be open at the exact price as the trader anticipates. The market orders exchange fills your order at the “best available price”, however as other traders do the same, the price is sensitive leading to swing price movements.

For example, a trader places a buy execution price for a token at $100, however as there are millions of tokens in circulation the price fluctuates quickly. The trade is executed as the price increases to $102 and the trader is left having to pay more for the token.  

As the order has been completed, traders refer to this as “the order has been filled”.

What is a limit order and how does it work?

A limit order is an order that is executed at a specific price or at a better price. A buy limit order can be executed at a specific price or a lower price, and a sell limit order at the limit price or a higher price.

In this scenario, the trade would only be executed if the price reaches the exact point the trader has set as an appropriate entry point.

Let’s say Bitcoin is currently trading at 21,000 Euro and a trader wants to buy 1 Bitcoin at 20,000 EUR. The trader would place a limit buy order at the ask price of 20,000 EUR, so as Bitcoin decreases and hits the 20,000 EUR mark the buy limit order is triggered. In contrary, if the trader thinks that Bitcoin would fall after it touches 25,000 EUR, he/she set up a sell limit order at 25,000 EUR. After the 25,000 EUR mark is reached the trader’s sell order triggers.

It is important to note that if the limit order is not met by an interested buyer or seller in the time period specified, the order will not be filled.

What is a stop order and how does it work?

A stop order (a.k.a. stop-loss order) is executed when the current market price of a trade reaches a specific price level set by the trader. A buy stop order is set when the trade is above the current market value price. This strategy is most often used when traders want to protect their short sells if the price rises. A sell-stop is the opposite. That is where traders set a specific price under the current market value to protect their long positions if the trade price falls. 

For example, in a sell-stop order scenario, a trader owns a token worth $20. The trader has placed a sell stop order at $18 to protect from bigger losses. If the trade dips to or below $18, the sell-stop order would activate, automatically exiting the long position. In the opposite example, a buy-stop order is useful when the trader has shorted a token at, say, $30 and has placed a stop order at $35. If the price of the token increases to or above $35, the trade would close.

Furthermore on this topic, a trailing stop order is a modification of a stop order where a defined percentage or dollar amount are set accroding to the current market price. Trailing stops only move if the price moves favorably. When the price of an asset moves in a profit or reduce a loss it does not move back in the other direction. The key to using a trailing stop successfully is to set it at a level that is neither too tight nor too wide.

Other factors

The crypto market is a very dynamic environment, so it is important to note that setting up different market orders carries certain volatility. Getting a hang of the different market order types and executing successful trades can be challenging. Before placing any trades, traders have to be familiar with a range of other factors that can have an effect on their orders. 

Some of these risks involve market pricing gaps, which could sometimes occur between stock trading sessions or trading halts of trading platforms. In such a scenario, the set price of the trader’s order could be executed at a significantly higher or lower trigger price. Another risky scenario is a low-volume volatile environment where your order executions may experience a lag time and severe price moves. This in turn could trigger your order to be executed at a different price level(s) that you never intended to be trading at. This is what traders call slippage.

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