You’ve decided you want to buy bitcoin or any of its derivatives and you know exactly how much money you are willing to invest. Now, all that is left is placing the actual order. For new investors, this process may be more confusing than it seems. Before choosing the order you want to make, you need to choose the order type.
What are order types?
Order types are different types of transactions that you engage in through the trading platform you choose to use. You don’t need to be an expert trader to know this. After all, the order type you choose will affect your investment decisions and their potential outcome. Let’s start by first looking at how an order is placed, and then look at three common types of orders.
How an order is placed?
When you select “buy” or “sell” in your preferred cryptocurrency exchange, the transaction is placed in the order book and it is filled as soon as your entry price point is hit. The system that runs the order book is rather complex, and its many variables determine how exactly your order is filled. Using the right order type can impact these factors and makes a big difference on whether you make a profit or not. As such, it becomes important to understand the three main order types.
3 types of orders
Let’s take a look at the most common types of orders you can make when trading cryptocurrencies or stocks.
A market order indicates that you want your order to be filled immediately. In other words, you are trading on spot markets and choose to go with the next available price. Since the volatility of the crypto markets is rather high, the pricepoint you choose to buy at may be different from the price that your order is filled in. Investors who choose this type of order are more concerned with the speed of the transaction’s confirmation, rather than the price they are looking to pay. The relative lack of restrictions of this order type ensures that it will always be filled but at a risk of doing so at an unexpected price. For example, assume you want to sell one Bitcoin at $50.000. But if the price is dropping rapidly, and other investors are selling at the same time, the price could drop below your target before the book reaches your order. To mitigate risk with market orders, traders usually choose coins with high liquidity instead of small-cap options.
If you want to sell at an exact price point, it is better to use a limit order. With this type of order, you specify a price, and the order will remain open until it can be filled at the desired price. Limit orders are the default option when trading spots in cryptocurrency exchanges like Binance, which is both good for traders and risky for those who want to swing through the volatility. Investors usually go for limit orders when they are less concerned about the time and more concerned about the price. You may, for example, make a limit order right after you sell a coin, to indicate the price at which you want to re-enter the market. You can then go about your day without having to sit in front of the screen waiting to catch the right price point.
The last type of order is the stop order. In essence, this is a market or limit order with an activation price that triggers the order. When the price of bitcoin reaches its activation price, it is filled (either buy or sell). This is the type of order many crypto traders refer to as “stop-loss”, a strategy that is often used to limit their losses in case a trade does not go in their favour. Note that stop orders are used for both sell-stop and buy-stop, depending on the goals of the trader.
There are three types of stop orders:
- Stop market – An asset is sold at a predetermined selling point when or if it reaches that point.
- Stop limit – When an asset reaches a stop market point, a limit order is automatically placed to rebuy the asset at a lower price point, giving a good entry position.
- Trailing stop – The stop-loss order line increases together with the price growth of the asset you choose to invest in. For example, if you want to buy Bitcoin at 50.000$ and set a stop loss at 49.500$, the stop-loss would increase to $50.000 if Bitcoin’s price goes to 50.500$.
Each of the order types above has its advantages and disadvantages, and it is recommended that you plan for each scenario. Learning how to operate your trades effectively is the easy part; the actual hard part happens when emotions get in the way. Hence, remember to plan your target with logic instead of marketing-inflated expectations.