Common Order Types in the Crypto Market
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Bitcoin has been a sensation these past few years, and it has brought millions of new users to cryptocurrency exchanges. Below we describe the common order types used in crypto trading, which range from essential to advance and hopeful this will give a better understanding of what order types are catered to your trading strategies.
BTC price is reported predominantly as a consolidation of multiple cryptocurrency exchanges BTC price. Thus, BTC does not have a set amount because each exchange has its own trading volume and price. An exchange is a platform where traders go to both be a buyer or seller and execute trades under a fixed set of rules enforced by the exchange operator.
How do exchanges work? All trades that happen on an exchange starts in the order book, where market makers create liquidity by placing orders, and market takers chose the price from the order book that deems fair to them. Once a market taker 'hits' on the price that was set by the market maker, the trade executes, and the order is removed from the order book. Orders in the order book are sorted by the price, but when two orders have the same price, then they are arranged by the timestamp of when that order was placed.
Each order book within the exchange corresponds to a single trading pair, which is identified by a ticker, 3-4 character long identifier. For example, when a trader wants to trade dollars for bitcoin, they will go to the USD/BTC order book. Crypto order books vary in liquidity; some pairs barely trade at all while other order books carry billions of dollars in orders. As a value, traders can use the circulation, price and volume of all orders in a book to measure information on the assets being traded. This information can help inform traders of market condition, supply and demand curves and many other indicators.
Now let's explain how the exchange makes a profit, it's simple, they profit by extracting fees from trades that are done on their platform. Below are the most common fees that exchanges charge traders:
Trading fees: a percentage applied to the total value of the trade. The cost can vary by exchanges since some may charge a more significant rate from market takers. Withdrawal fees: this is a flat fee that is charged for withdrawing crypto from your exchange account.
Basic order types
Let's start by explaining what order is; it is an instruction to buy or sell on a trading venue. Each crypto exchange offers a different set of order types. Basic order types are the most straightforward sets of instructions. Most exchanges provide the below basic order types:
Market orders Market orders are the easiest order type to execute, as long as there is enough volume to match your order, it will be filled instantly. A market order to buy is filled at the asking price, which is the lowest sell order in the order book. A market order to sell is at the bid price, which is the highest buy order in the order book.
When a trader inputs a limit order to buy, they set the highest price they are willing to pay for the trade. The order will be executed when the price reaches the set level or lower. When a trader inputs a limit order to sell, they set the lowest price they're willing to sell for and will be executed once the price reaches that level or higher. Once a limit order is placed, the trader's funds are typically reserved in their account, and their order appears in the order book.
When a trader places a limit order, it doesn't guarantee that the trade will be executed. There are several ways of timing limit orders so that traders can remove or amend them if they aren't executed:
Good 'Til Cancelled: This order type places an order that remains active open-endedly until it's fulfilled, therefore the name. When a trader places a GTC order, they don't always have to watch the markets to execute their trades.
Execute by: Alike, a trader might choose to set an expiry date on order they place. In this case, they will select their trade to execute by a specific time and date, or the order will be automatically cancelled after that time and date have passed.
Fill-or-Kill: This type of limit order means that the trade must occur immediately or not at all. Fill-or-Kill is mostly useful in fast-moving markets.
Stop Limit Order Stop Limit order is when a trader wants to purchase a cryptocurrency when the market price touches an explicitly stated price (which is the stop price) below the market price. At the same time, the trader does not want to pay more for the buy order, therefore sets a limit price. Hence the stop price, in this case, is placed below the current market price and the trader expects to buy a given amount of crypto at a lower price than current market price when the market price falls. The limit price is set above the current market price.
The trigger price of a trailing stop order changes with the market price. Instead of directly hitting the trigger price, a trader will give a trail value. So a trader is buying. If the market price moves up by the trail value, their order will trigger. If the market price moves down past the lowest point seen when the trader entered their order, then it'll only trigger if the price moves up by trail value from that new lowest point. If the trader is selling, the trail value must be negative.
Example: BTC-LTC is trading at $20,000. A trader enters a buy stop-loss order with trail value 20 and size 2. If the market price never dips below $20,000, the order's trigger price is $20,010. If BTC-LTC falls to $19,998, then the trigger price will follow it down to $20,008. If BTC-LTC moves up to $20,008, your order will trigger, and a market order buy for size 2 will be sent.
Advanced order types
Advance orders are more complex than basic orders, adding different parameters and requiring more knowledge from traders. Not all exchanges offer advance orders, so it's always best to check which order type the exchange carries. Below are some the top advance orders used in the crypto market:
If a trader wants to alleviate risk, then they might choose a One Cancels Other order, which means that two orders are placed at the same time. As soon as one of the order is filled, the other is cancelled. If a trader uses an OCO orders to enter the market, they also usually place a stop-loss order manually to protect against any dips in the price.
Stop orders are used to protect the trader's profits and minimize their losses if the price abruptly changes. The order is only executed if the price reaches a certain level. Stop orders are different from a limit order because once the order is activated, it turns into a market order.
Hidden orders are used when traders want to place an order without influencing the market. They might want to place a large order of BTC without much initial volume. In this case, the trader would place a hidden order. These orders aren't displayed in the order book and are executed after the "visible" orders have been filled.
In reading this blog, I hope you have some understanding of what some of the common order types are and how they work. If you have any questions, please comment below.
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