Guide to Cryptocurrency Exchange Order Types

August 2, 2021
6m
Read Time

After journeying through our trading and investment series, you have accumulated enough knowledge to step forth into the cryptocurrency market and make your first trade. Trading starts at an exchange’s terminal, and the first step needed to buy, sell, or exchange assets is to create an order.

There are various types of orders to choose from. The commonly used orders include:

  • Market orders
  • Limit orders
  • Stop-limit orders

In this lesson, we will cover each order type to provide you with insight into efficiently trading cryptocurrencies. After all, the first step is the most important one, and we advise overlooking a fundamental piece of the trading experience.

Market Orders

Out of all the order types, market orders might be the easiest to understand for new investors. It also happens to be an order type that provides the best experience for people who are learning to trade for the first time.

What is a market order?

A market order is an order that is automatically placed at the current best market rate for an asset pair. When placing a market order, the price of the trade is determined by the current rates that are available on the order books.

A trader that executes a market order only needs to specify the amount of the asset they would like to buy or sell. The trader does not specify a price since the price will be decided by the current best rates that are available in the market.

Once the market order is placed, it will continue to buy or sell the specific asset until the order has executed the desired amount that was entered for the order.

Concerns with Market Orders

The disadvantage of market orders comes from the way that order books work and how market orders continue to buy or sell an asset until they have reached the desired amount. When a market order buys or sells all of the assets available at one price, the market order will continue to buy or sell the asset at the next best price.

This process will continue if the order is large enough to buy out all of the available open orders at individual levels. That means each time the market order buys all of the available asset at one level, the next available price gets worse.

This process is called slippage.

Slippage can cause traders to pay more for an asset than they intended. That is why we recommend caution when using market orders with high volume trades (or low volume trading pairs). Always ensure the market pair we are trading on has sufficient liquidity.

Limit Orders

Unlike market orders where traders only need to specify an amount they would like to trade of an asset, limit orders require the input of a precise order price and amount. In the image below, we see an illustration of how Buy limit (open) orders are placed on the Bid side of the order book while the Sell limit (open) orders are placed on the Ask side of the order book.

As the market moves, open orders are taken by other traders on the exchange. When our limit (open) order is taken by another trader, that means the trade is completed and our order is filled.

Setting a limit order

Before we place our trade to buy or sell an asset, we must first understand how the order book works. This is important when picking the price that you want to set for your trade.

The BTC / USDT order book is shown in the image to the right.

When we place a limit order on the exchange, we have two options. Either we can place an open order on the exchange for someone else to take or we can take someone else’s open order that is already available on the exchange.

The order book to the right shows the available open orders for the BTC/USDT trading pair. If we wanted to buy Bitcoin, we could use this order book to trade USDT for Bitcoin.

In this order book, we can see the current lowest price that someone is willing to sell Bitcoin is 9831.19 USDT. At the same time, the highest price someone is willing to buy Bitcoin is 9831.05 USDT. That amounts to a difference of 14 cents.

The small gap between the lowest selling price and the highest buying price is called the spread. This spread is labeled in between the two order books.

When we decide to buy Bitcoin, we can either place an open order on the buy-side (green text) or take the best offer on the sell-side (red text). Since the best offer on the sell-side is 9831.19 USDT, we can instantly take that available offer to get Bitcoin.

Otherwise, we would need to place an open order for less than or equal to 9831.05 USDT on the buy-side. These open orders would need to wait until someone else agrees to sell at the open order price. There is no guarantee someone else will ever agree to sell at the open order price, so we don’t know how long it will be until we get our Bitcoin.

Stop-Limit Orders

Stop-Limit orders combine the benefits of limit orders with those of stop orders. This order type is used to execute precise limit orders once a specific price point has been met by the market.

How stop-limit orders work

Stop-Limit orders work by setting both a stop price and a limit price. The stop price determines when the limit order will be placed. Once the price of the asset reaches the stop price, the limit order will be placed at the limit price.

When the limit order is placed, it will execute any trades that are available at the limit price or better. Any unfilled portion of the limit order will remain on the exchange as an open order at the limit price for other traders to take.

Essentially, that means a stop-limit order will buy or sell the desired asset once the stop price is reached. The order will continue buying or selling the asset until the specified amount for the order is filled or until the stop price is reached. After the stop price is reached, any remaining unfilled balance for the order will be placed as an open order on the exchange at the provided stop price.

A stop-limit will not execute any trades at a worse price than the specified stop price. This allows traders to have precise control over how their order is executed with the exchange.

Setting a stop-limit order

Stop-Limit orders require 3 primary pieces of information to execute. These are the stop price, limit price, and the order amount.

Once the order is opened with the exchange, the order will buy or sell the specified amount at the limit price after the stop price is reached.

As an example, say we currently own 1 Bitcoin. The current price for Bitcoin is $9,500, but we believe the price might go down. In this case, we could set up a stop-limit order to prevent us from taking excessive losses. We could do this by setting a stop price of $9,450, a limit price of $9,400, and an amount of 1 Bitcoin.

This order would then sell our Bitcoin holdings if the price dropped below $9,450. Our order would continue selling our Bitcoin until the price of Bitcoin went below $9,400. If the entire order wasn’t completed, the remaining balance will be placed as an open order at the price of $9,400.

Similar to the example of selling Bitcoin when the price is going down, we could also set up a stop-limit to buy Bitcoin when the price is going up.