Crypto Trading 101: Types of Orders
An order is an instruction placed on an exchange to buy or sell an asset. There are several types of orders, among them, the most well-known are market orders and limit orders.
Knowing the order types is a crucial factor to minimize portfolio losses and increase the chances of profit. This is a subject that every trader who wants to keep a healthy portfolio should understand.
In this article, the Empire Token Team brings you the most used types of orders in crypto exchanges, along with examples for better comprehension. We hope that by the end of reading, you will be able to better understand the functioning and purpose of each order type presented.
As the name suggests, a market order is a buy or sell order to be executed at the current market price. In this type of order, the concern with the immediate execution is above the concern with the price at which it will be executed.
When someone opens a market order, they are willing to buy or sell an asset at the best available price in the market at that specific time. Thus, there is no guarantee that the price at which the order was opened will remain the same, depending on the volatility of the asset.
Let’s suppose that a user of a certain exchange opened a market order to buy 1 ETH. In the exchange’s order book there are three sell orders: 1st — 0.4 ETH at $1,140; 2nd — 0.3 ETH at $900; 3rd — 0.7 ETH at $2,110.
In this case, the market order will be filled with all the shares from the 1st and 2nd selling orders in the order book, plus one share (0.3 ETH of the 0.7 ETH available) from the 3rd best order, for a total of $2,944.28.
This ensures that the trader’s buyer order will be filled immediately, but he/she has no control over the final paid price.
Another well-known order is the limit order. In this case, the buyer or seller can specify a limit price for the buy/sell of a certain asset, giving up the immediate execution of the order for the desired price.
When a trader opens a limit order to buy an asset at, for example, $100, his order will only be executed if there is a possibility of buying the asset at a price less than or equal to $100.
With a limit order, the trader guarantees that he will buy the asset only if the limit is reached. However, this order runs the risk of never being executed or only being partially executed, depending on the state of the market.
Similarly, a sell limit order will only be executed if some counterpart is available to buy the asset at a price greater than or equal to the sell price assigned to the order.
So if a trader opens a sell limit order for a certain asset at a price of $50, the sell will only be executed if a buyer offers $50 or more. Thus, in both cases, a limit order runs the risk of not being executed or, if executed, not being completely filled.
Other order types have emerged from limit orders to try to make sure that all the shares in the order will be sold and thereby fill the entire order. Some of the most commonly used constraints are Fill-or-Kill and All-or-None orders.
In FOK orders, the trader tries to make sure that all the shares of the asset to be sold/buy are filled. If there is no available counterpart in the market to fill the order, it will be immediately cancelled.
All-or-None orders are similar to Fill-or-Kill orders in the sense that all shares requested must be bought/sold at a certain price or the order will not be executed. In this way, buying/selling only a part of the shares/assets is avoided.
The main difference between AON and FOK orders is in the way they are cancelled. FOK orders prioritize the immediacy of the transaction or the complete cancellation.
AON orders, on the other hand, are not automatically cancelled, but remain open until there is an opportunity to buy/sell all the assets at the stipulated price.
Stop order or Stop-loss order
Stop-loss order is a type of order known for preventing excessive portfolio losses in highly volatile markets. In this type of order, the trader instructs the exchange to list his order in the order book as soon as the stop price is reached.
An example of a sell-stop order could be as follows: a trader owns an asset that is worth $100 at market price. However, fearful that the asset will depreciate, he sets a sell-stop order with a stop price of $90.
If the asset reaches the price of $90, his sell order is cataloged in the market order book to be sold at market price, i.e. at the best price available at the moment for that asset on the market.
This way, he avoids losing more of his portfolio if the asset continues to depreciate.
In this type of order, a stop price is first determined. If the stop price is reached, the order is activated as a limit order, i.e., it will only be executed if there is a counterpart willing to pay/sell at a price equal to or better than the limit price.
Like any other limit order, it will never be filled if the asset price does not reach the limit price.
An example of using a stop-limit order could be: a trader buys 1 BNB at $400. Preemptively, he sets a stop-limit order in case this asset depreciates.
So, the trader sets a stop price at $380 and a limit price at $390. If the BNB falls to $380, a sell limit order will be activated at the $390 limit price. In this way, the trader has tried to ensure that he will receive an amount greater than or equal to $390 per BNB if the price drops to $380.
However, there is a possibility that the asset will continue to depreciate, and his limit order will not be filled. For that reason, the combination of a stop-limit and stop-loss order is usually used to minimize capital loss by selling the asset at market price if the limit order is not filled.
In this order, the trader tries to capitalize on one asset out of two assets X and Y. If the condition is met for asset X, the order for asset Y is automatically cancelled and vice versa.
This order is then composed of two limit orders, one for each asset. For example, suppose a trader wants to buy asset X at $1 or asset Y at $3. To do so, he sets a buy-limit order for X at $1 and a buy-limit order for Y at $3.
If asset X reaches the price limit, then the order for X is executed and the order for Y is automatically cancelled.
This type of order remains active indefinitely until the buy/sell price for the asset is met or until it is cancelled by the trader.
A GTC order will never be automatically cancelled and therefore requires manual cancellation by the investor.
An IOC order is also known as an “accept order.” Unlike an AON or FOK, where complete fulfillment is required, or the order is cancelled, an IOC accepts partial fulfillment.
So if an investor wants to buy the largest quantity of an asset at a given price, an IOC order is usually a good option. By executing an IOC order, the trader will get all the shares of the asset available at the price he has predefined, and then the order is immediately closed.
Trading cryptocurrencies may seem very complicated at a first glance, but with every new knowledge acquired, it becomes easier. For this reason, Empire Token always seeks to bring to its community the most secure and well-grounded information to help increase your gains and decrease your losses when trading crypto. We will be happy to answer any questions.
Keep learning with Empire!