Different Types of Orders You Should Know

To trade stocks or cryptocurrency, you must place orders to interact with the market. The two types of orders are market orders and limit orders. A market order means buying or selling at the current market price immediately. Meanwhile, a limit order means waiting until the price hits a predetermined limit or a better price before execution. These orders have various variations, which depend on your preferred trading approach. Would you like to know more? Keep reading.

Basics

Are you new to exchange and confused about the various buttons? Or have you just finished watching "Wall Street" and want to understand how the stock markets work? This article will focus on orders - the instructions to buy and sell assets on an exchange. The two main types of orders are market orders and limit orders, but these are just the beginning of the different types of commands available. Let's dive in and explore further.

Market Order vs. Limit Orders

If you want to execute a trade immediately, you would use a market order. For example, if you are on an exchange and you want to buy 2 BTC, and Bitcoin is trading at $25,000, you can place a buy market order for $50,000. The exchange matches your market order with an existing limit order in its order book, which is a list of orders that are not executed immediately.

For instance, another user might have placed a sell order earlier to the exchange to sell 2 BTC when the price reaches $25,000. When you place your market order, the exchange matches it with the limit order, which removes it from the order book, and you become a taker as you took some of the exchange's liquidity away. The user who placed the sell order is a maker because they added liquidity to the order book.

Typically, makers enjoy lower fees than takers because they provide a benefit to the exchange. For a more comprehensive understanding of how exchanges operate, you can refer to the article "Market Makers and Market Takers, Explained."

Understanding Market Orders

Market orders are one of the two fundamental kinds of market orders which are buy and sell orders. These orders instruct the exchange to execute the trade at the best possible price available at the moment. It's important to note that the best price might not always be the current value displayed, as it depends on the order book. Thus, your trade could end up executing at a slightly different rate.

Market orders are ideal for instant or near-instant transactions. However, these orders come with some downsides. Due to the fees incurred from slippage and the exchange, the same trade could have been cheaper if done with a limit order.

Types of Orders You Should Know

Buy market orders, sell market orders, buy limit orders, and sell limit orders are the basic types of orders in trading. However, relying solely on these orders can limit your trading experience. To fully capitalize on market conditions, whether in short-term or long-term setups, you can expand your strategies beyond these basic orders. By exploring additional order types and variations, you can enhance your trading potential and adapt to various market scenarios.

Stop-Limit Orders

• Stop-limit orders are useful for limiting losses in a trade.
• This order type allows you to set a stop price and a limit price.
• For example, if BTC was trading at $50,000, and you set up a stop-limit order at a stop price of $49,500 and a limit price of $49,490, a limit order will be placed at $49,490 when the price dips from $50,000 to $49,500.
• This order is only placed after the stop price is hit, and there is a risk of the price not recovering, leaving you with no protection if it continues to dip below $9,985, and the order may not be filled.

One-Cancels-the-Other (OCO) Orders

• OCO order is a sophisticated tool that combines two conditional orders.
• As soon as one is triggered, the other is canceled.
• For example, with the BTC trading at $8,000, you could use an OCO order to either buy Bitcoin when the price reaches $7,800 or sell it when the price rises to $9,000.
• One of the two orders will be executed first, and the second one is automatically canceled.

What’s Time in Force?

When it comes to orders, one key consideration is the concept of time in force. This refers to a parameter that you set when opening a trade, which determines the conditions for when the order will expire.

Good 'Til Canceled (GTC)

• A GTC order remains open until it is executed or manually canceled.
• This is the default option for most cryptocurrency trading platforms.
• In stock markets, it is common for orders to be closed at the end of the trading day, but since crypto markets operate 24/7, GTC orders are more prevalent.

Immediate or Cancel (IOC)

• IOC orders require immediate execution and any portion of the order that is not filled immediately is canceled.
• For example, if you place an order to buy 7 BTC at $11,000, but you can only purchase 3 BTC at that price, the remaining part of the order will be canceled.

Fill or Kill (FOK)

• FOK orders must be either filled immediately or canceled.
• For instance, if you place an order to buy 5 BTC at $11,500 and the exchange cannot provide the entire order quantity at that price, the entire order will be canceled instead of being partially filled.

These different types of time-in-force orders allow traders to specify the conditions for the execution and cancellation of their trades based on their preferences and trading strategies.

Conclusion

To become a skilled trader, understanding the various types of orders is crucial. By mastering the use of stop-limit orders, one can reduce the risk of incurring losses, while the OCO orders allow traders to prepare for multiple scenarios. Becoming familiar with the trading tools at your disposal is an essential step to successful trading.