October 21, 2020

Types of orders on crypto exchanges: limit, passive, stop loss

Types of orders on crypto exchanges: limit, passive, stop loss

Trading on the cryptocurrency exchange is reduced to placing their own and satisfying other people's orders (orders) for purchase / sale of cryptocurrency. At first glance, the process may seem simple, but there are many subtleties in the trading itself. One of them is the different types of trading orders, which we will now consider.

Why do we need different types of orders?

Types of orders exist in order for a trader towhich submits a request to buy or sell assets, retained some control over its order after entering the market. That is, a person who buys or sells stocks, goods or currencies can insert many other smaller instructions into one simple instruction.

In trading with cryptocurrencies or other assets, everythingorders on exchanges are divided into several categories depending on the conditions for their execution. Very often, additional instructions can be attached to orders, changing their parameters, execution time, and much more.

Once upon a time on the Nasdaq American Exchange there were 136types of orders developed by doctors of science who specialized in various aspects of high-frequency trading. However, all this diversity was built on the basis of only two basic orders - limit and market.

Understanding the principle of operation of different orders is the basis of trading on the exchange.

What is a market order?

A market order is essentially the most basic form of a trader’s application and is an indication of the purchase or sale of cryptocurrency at the best price currently available.

If you go to a cryptocurrency exchange and want toto purchase something right now, you turn to the seller with the most favorable affordable price and make a deal. Common among beginners, this type of order is often considered the simplest. It can be convenient when you just want to quickly enter or exit a position with sufficient liquidity.

Types of orders on crypto exchanges: limit, passive, stop loss

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Please note that marketersorders are considered “takers”, since these orders instantly coincide and as a result “take” liquidity from the order book (general book of orders). On the other side of the transaction are the “makers” - we’ll talk about them right now.

What is a limit order?

A limit order sets a specific price, atwhich trader wants to buy or sell an asset. An order is executed only if the market price of the asset reaches the level indicated by the trader.

While market orders are executed immediately, limit orders are executed at a predetermined price, which is usually better than the current market price.

  • EXAMPLE: do you think the value of bitcoin is about towill go down. The implementation of a limit order will allow you to set the execution price, for example, $ 500 below the current market price by sending the order to the order book or orderbook. If BTC drops to this price, then the limit order will be executed and the transaction will be concluded at your desired price.

This process allows traders to set limits and control their risks.

Types of orders on crypto exchanges: limit, passive, stop loss

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Thus, traders know that their pricerestrictions are set, and that they will not be forced to constantly monitor the market in order to complete transactions. The reason why limit orders are regarded as “makers” is because they are placed in the glass of the exchange, which literally “makes” the market.

What is a stop order (stop loss)?

Stop orders are similar to limit orders, but withsome differences. The trader’s limit order is placed immediately and executed after reaching a certain price. A stop order is placed only when a certain price is reached. It can be used in conjunction with a market or limit order.

That is, the key difference is thatlimit orders are already placed in the glass of the exchange and anyone can see them, while stop orders are “invisible” until certain conditions are met. Using a stop order, you can set the pending execution of a market or limit order, which gives the trader flexibility in trading.

Interesting combinations are obtained. For example, if you set a market stop order to sell after an asset reaches a certain price, it will be immediately sold at the best price if the conditions are met. A limit stop order allows you to set a limit order if the market price of an asset reaches a certain level.

Types of orders on crypto exchanges: limit, passive, stop loss

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  • EXAMPLE 1: Do you expect Bitcoin to grow to 10 thousand dollars andYou want to buy it at this price, but only if BTC crosses the line you need. You place a market stop order, which immediately carries out the purchase of cryptocurrency upon reaching predetermined conditions.
  • EXAMPLE 2: Again, you are expecting to grow to 10 thousand againdollars and are confident that after crossing this line, active Bitcoin trading will begin. However, you are only willing to purchase it for $ 10,100. That is, to execute this scenario, you need to set a limit stop order. In this case, after reaching the threshold of 10 thousand dollars, a limit order to buy cryptocurrency at a price of 10 100 dollars will be placed in the order book.

Stop orders give us flexible tools forimplementation of different strategies. In the example above, you could immediately buy Bitcoin at $ 10,100, however, you had no guarantees that the cryptocurrency would necessarily cross the $ 10,000 line in the future.

What is a scalable order?

Scalable orders use severallimit orders for a gradual buy or sell. This can help to average out the impact of market fluctuations over time, as well as mitigate the effect caused by a large order.

Sometimes a trader wants to take severalsmall deals at different prices. There may be several reasons for this, one of which is averaging, that is, buying an asset from time to time in the wake of its growth or decline. Averaging is often used as a strategy to minimize risks while maintaining optimal returns.

Another reason is to hide a largeorders to sell or buy in case a trader needs to sell a huge amount of cryptocurrency. This is done to minimize the impact on the market. Large orders can not only have a significant impact on the market by moving the price, but also serve as a psychological trigger for other traders.

To avoid this massive buying or sellingcan be divided, for example, into ten smaller orders placed in a range of price levels. And for the most part, it will look like normal order-book activity.

What are time-in-force instructions?

On stock exchanges, this phrase can be found quite often. This is a parameter that determines the time the order remains in the order book. If it is not satisfied, the application will be canceled.

It is useful to set the parameter "in action" todo not forget about old orders. For example, a trader can leave his request to buy or sell a cryptocurrency a few weeks ago and forget about it. If in the new market environment the execution of the order is undesirable, it will incur losses. In this case, the time-in-force parameter comes to the rescue.

The simplest variant of the parameter is “good tillcanceled ”, which leaves the order in the order book until the trader cancels it. It is usually set by default for all trades. There are also “immediate-or-cancel” orders that are automatically canceled if they cannot be executed as soon as they enter the order book. Likewise, the "fill-or-kill" option cancels the order if it is not completely satisfied by another market participant after it hits the order book.

What is a passive order?

The last type of parameters that can bebuilt into the order logic, this is a "post-only" option. It allows you to make sure that the order is placed if and only if it cannot be executed immediately.

If the order to buy (or sell) immediatelycoincides with the opposite order, a deal occurs. In many cases, the trader does not want to place an order if it is immediately satisfied by another market participant, that is, the trader wants to avoid paying commissions when placing limit orders. This is due to the nature of the makers and takers that we talked about earlier.

Generally speaking, on exchanges, limit orders will be subject to significantly lower fees than when placing market orders, since they provide liquidity.

So the conclusion is obvious: cryptocurrency traders have enough tools to work in the market. Beginner players should understand them properly before using them. Otherwise, you may not take into account some important feature and lose your deposit. And nobody needs it.

TOP 5 crypto exchanges by trading volume for 2020 (the most reliable platforms)

# Cryptocurrency exchange Official site
1 Binance https://binance.com
2 Huobi https://huobi.com
3 Exmo https://exmo.com
4 OKEx https://www.okex.com
5 Yobit https://yobit.net

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