Cryptocurrency trading has emerged as a highly lucrative endeavour within financial technology (FinTech). Given the speculative nature of crypto, being well-versed in the available trading tools, such as a crypto order, will enable investors to make informed decisions.
Crypto orders are the cornerstone of cryptocurrency trading, enabling individuals to buy, sell, and manage digital assets. These orders act as instructions to cryptocurrency exchanges, dictating the terms and conditions under which transactions should occur.
This comprehensive guide delves into the basics of crypto orders, explaining their various types, functionalities, and strategic applications. Whether you’re a seasoned trader or a curious novice, this guide will equip you with the knowledge necessary to make informed decisions and capitalise on the opportunities presented by the cryptocurrency market.
Understanding The History Of Cryptocurrency Assets
A crypto order is an instruction to buy or sell a cryptocurrency at a specific price or according to certain conditions. It is a crucial tool for executing your trading strategies and managing your positions in the volatile cryptocurrency market.
Crypto orders are placed on cryptocurrency exchanges, which act as digital marketplaces where buyers and sellers can meet to exchange cryptocurrencies.
Purpose Of Crypto Order
Crypto orders serve several crucial purposes in the cryptocurrency market:
Facilitating Trades: Crypto orders enable you to actively participate in the cryptocurrency market by buying or selling specific cryptocurrencies.
Price Discovery: The accumulation and matching of crypto orders contribute to the price discovery process, determining the current market value of cryptocurrencies.
Liquidity Provision: Crypto orders provide liquidity to the market, making it easier to buy and sell cryptocurrencies without significant price impacts.
Risk Management: Crypto orders can implement risk management strategies, such as setting stop-loss or take-profit orders to limit potential losses or secure profits.
Let’s now dive into the types of crypto orders available in the market.
Types Of Crypto Orders
There are various types of crypto orders, each with its characteristics and applications:
Market Orders
Market orders are the most straightforward type of order used in cryptocurrency trading. You instruct the exchange to execute a trade immediately at the best available price in the market. This ensures that your order is filled quickly and efficiently, but it also means you may get a different price than you want.
A market order is an instruction to buy or sell a specific cryptocurrency at the market’s best available price when the order is placed.
Critical Features Of Market Orders
Instant Execution: Market orders are guaranteed to be executed immediately, ensuring you can quickly enter or exit positions.
Fulfilment Guarantee: Market orders are always filled, providing certainty that your trade will be completed.
Slippage: Due to the dynamic nature of the market, the executed price may differ slightly from the displayed price, resulting in slippage.
Taker Orders: Market orders are considered taker orders, meaning you take liquidity from the market and incur higher trading fees.
Example Of A Market Order
Suppose you want to buy 1 Ethereum (ETH) at the current market price. You place a market order, and the order book on the cryptocurrency exchange shows that ETH’s best-selling price is $1,200. In this case, your market order will be filled immediately at $1,200, and you will receive 1 ETH in exchange for $1,200.
Limit Orders
A crypto limit order in cryptocurrency trading allows you to specify the price you want to buy or sell a cryptocurrency. Unlike market orders, executed immediately at the best available price, limit orders will only be achieved if the market price reaches the specified price or better.
Critical Features Of Limit Orders
Trader-specified Price: The defining feature of a crypto limit order is setting the price you want to buy or sell the cryptocurrency. It gives you more control over the price at which you execute your trades.
Greater Control Over Quantity: Limit orders also allow you to specify the exact amount of cryptocurrency you want to buy or sell. It can be helpful for you who want to execute large orders or who want to spread your orders over multiple prices.
Delayed Execution: A crypto limit order may take time and may only be partially filled. This is because the market price may not reach the specified price, or there may need to be more sell orders (or buy orders) at the specified price to fill the entire order.
Maker Orders: Limit orders are considered maker orders because you add liquidity to the order book. When you place a limit order, you offer to buy or sell cryptocurrency at a specific price. It helps to create a two-way market and makes it easier for others to execute your trades.
Example Of a Limit Order
Suppose you buy 1 Ethereum (ETH) for $10,000 or less. You would place a limit order to buy ETH at $10,000. This order would only be executed if the market price of ETH fell to $10,000 or lower. If the market price of ETH remains at $10,000 or above, your order will not be executed.
Instant Orders
Crypto instant orders, or spot orders, are cryptocurrency trading orders that allow you to buy or sell cryptocurrencies at the current market price. They are similar to market orders, but instead of specifying the amount of cryptocurrency to trade, you specify the amount of fiat currency to spend.
Key Features Of Instant Orders
Immediate Execution: Instant orders are executed at the current market price, ensuring that trades are completed quickly and efficiently.
Fiat Currency Transactions: Unlike market orders, instant orders involve the exchange of fiat currencies, such as USD or EUR, for cryptocurrencies.
Multiple Seller Matching: A single instant order may be fulfilled by various sellers, with each portion executed at the current market price.
Example Of Instant Order
Suppose you want to buy $15,000 worth of Ripple (XRP). The current market price of XRP is $20,000. If you place an instant order to buy $15,000 worth of XRP, the exchange will seek out sellers willing to sell XRP at the current market price. The trade will be executed once the $15,000 worth of XRP matches.
Stop Orders
Crypto stop orders are trading orders used to manage risk and protect profits in cryptocurrency trading. They are conditional orders that trigger when the price of a cryptocurrency reaches a specific level, known as the stop price.
Once the stop price is reached, the stop order is automatically converted into a market order, executed at the next available price.
Key Features Of Stop Orders
Stop orders offer several key features that make them valuable tools for cryptocurrency traders:
Risk Management: Stop orders can help limit potential losses by automatically selling your cryptocurrency if the price falls below a certain level.
Profit Protection: Stop orders can also protect profits by automatically selling your cryptocurrency if the price reaches a certain level.
Automation: Stop orders can be placed in advance, so you don’t have to monitor the market to execute trades constantly. This can be particularly useful if you cannot actively trade during the day.
Example Of Stop Orders
Let’s say you buy Bitcoin at $20,000 per coin. You are bullish on Bitcoin in the long term but also concerned about the potential for short-term volatility. To protect your profits, you place a stop-loss order to sell Bitcoin at $18,000 per coin.
This means that if the price of Bitcoin falls to $18,000 per coin, your stop-loss order will trigger, and your Bitcoin will be automatically sold at the next available price. This will limit your potential loss to $2,000 per coin.
Stop-Limit Orders
Stop-limit orders are advanced trading orders that combine two price levels: the stop price and the limit price. The stop price acts as a trigger, activating the order when the market price reaches or surpasses that level. Once triggered, the order converts into a limit order, executing at or better than the specified limit price.
Key Features Of Stop-Limit Orders
Stop-limit orders offer several key advantages that make them a valuable tool for cryptocurrency traders:
Risk Management: Stop-limit orders help traders limit potential losses by automatically executing trades when the market price moves against them. This feature is handy for protecting profits or minimising losses during market volatility.
Execution Precision: Unlike market orders, which execute at the best available price, stop-limit orders give traders more control over the execution price. By setting both the stop and limit prices, traders can ensure that their trades are executed within their desired price range.
Flexibility: Stop-limit orders can be used for buy and sell orders, making them versatile tools for various trading strategies. Traders can use them to protect profits, limit losses, or enter new positions at specific price levels.
Example Of A Stop-Limit Order
To illustrate the application of stop-limit orders, consider the following scenario:
A trader holds a long position in Ethereum (ETH) at a current price of $1,500. They believe that ETH has the potential to reach $2,000 but are concerned about the possibility of a sudden price drop.
To protect their profits, they decided to place a sell-stop-limit order.
Stop Price: $1,400
Limit Price: $1,350
This stop-limit order instructs the exchange to sell the trader’s ETH holdings if the price falls to $1,400 or below. However, the order will only be executed if the price can be sold at $1,350 or better. The order will remain active unless the price drops below $1,350 without reaching $1,400.
Stop-loss Orders
A stop-loss order is an instruction placed with a cryptocurrency exchange to automatically sell a specific cryptocurrency asset when its price falls below a predetermined level, known as the stop price.
It’s important to note that when a stop loss crypto order is placed, a portion of your balance becomes locked, ensuring the order can be executed when the stop price is reached. Additionally, slippage is possible, which occurs when the order is executed at a price less favourable than the stop price due to sudden market movements or illiquidity.
Such orders are an essential component of risk management in cryptocurrency trading. They help you define the maximum potential loss you will accept on a particular trade. Setting stop losses crypto orders can prevent your losses from spiralling out of control, particularly in the unpredictable and often volatile cryptocurrency market.
Key Features Of Stop-Loss Orders
Here are some of the critical features of crypto stop loss orders:
Automated Execution: Stop-loss orders are automatically executed once the stop price is reached, eliminating the need for constant monitoring and reducing emotional trading decisions.
Risk Management: They effectively cap the potential loss on a trade, preventing significant losses in volatile market conditions.
Protecting Profits: Stop-loss orders can also protect profits by selling a portion of a holding if the price falls below a certain level.
Example Of A Stop-Loss Order
Imagine you buy Cardano (ADA) at $20,000, believing the price will continue to rise. You set a stop-loss order at $18,000 to protect yourself from potential losses. If ADA prices fall below $18,000, your stop-loss order will automatically trigger, selling your ADA at the prevailing market price. This limits your potential loss to $2,000 per ADA.
Time In Force
When trading in cryptocurrency, you must carefully consider the price at which you want to execute your orders and the duration for which those orders should remain active. It is where the concept of time in force (TIF) comes into play.
Time in force is an instruction specifying the time frame within which a trade order will remain active before it is executed or cancelled. It allows you to exercise greater control over your orders and manage potential risks associated with market volatility.
Standard Time In Force Options
There are three primary types of time-in-force instructions:
- Good ’til Canceled (GTC): This is the default time in force option for most orders. As the name suggests, a GTC order remains active until it is executed or manually cancelled by the trader. This option suits traders who quickly execute their orders and want to keep them active for an extended period.
- Immediate or Cancel (IOC): An IOC order prioritises immediate execution. The entire order is cancelled if any portion cannot be filled immediately at the prevailing market price. This option is ideal for traders who want immediate execution at the best price.
- Fill or Kill (FOK): Like IOC, a FOK order prioritises immediate execution. However, unlike IOC, a FOK order is cancelled if the entire order cannot be filled immediately. This option is preferred by traders who want to execute the whole order at the best available price or cancel it altogether.
Conclusion
Navigating the world of crypto orders can be daunting, especially for cryptocurrency market newcomers. However, by understanding the different types of orders, their functions, and how to place them effectively, you can take control of your trading experience and make informed decisions.
Keep in mind that crypto trading can attract taxes based on your jurisdiction. But, manually calculating taxes on each transaction can be daunting. Therefore, you can use KoinX. It is a platform that provides accurate crypto tax reports, which you can use to file your taxes. Join KoinX today and simplify the process of crypto tax reporting.
