When crypto trading first started, there were many risks involved, but people still fearlessly traded because the value of bitcoin (BTC) or other forms of cryptocurrency was not much initially. It was easier to trust strangers as there wasn’t an enormous amount of money at stake.
However, the story has changed in today’s crypto market, and a single bitcoin is worth thousands of dollars. Crypto trading today is not unregulated, and the trades aren’t limited to peer-to-peer (P2P) transactions. There are many different ways to trade bitcoin today. Back in 2009, when Satoshi Nakamoto first launched bitcoin, there were only a few methods available for exchanging cryptocurrency with fiat money. But now, you will find a wide range of cryptocurrency order types that allow trades to make regulated transactions online.
As of 2022, there are many laws surrounding crypto trading, including Anti-Money Laundering, Know Your Customer, and Counter-Terrorism Financing laws. Why were such laws introduced, you ask? Today, the crypto exchange market is worth over billions of dollars. As astonishing as it sounds, it is also true. People exchange cryptocurrency every day, and while its prices fluctuate, they now have a strong market presence worth billions of dollars. Not something that the government can overlook.
The modern crypto trading practices allow traders to make better decisions for maximizing profits and limiting their losses. This is where the different cryptocurrency order types come in. They have been designed to eliminate losses from the trader’s end by allowing them to buy or sell assets at their asking price. It makes trading more straightforward and more convenient, but most of all, it does not require any third-party involvement.
If you are new to crypto trading and are interested in learning about its order types, keep reading to get an in-depth understanding of how cryptocurrency order types work. But before that, let’s look at what an exchange order book is and how it relates to crypto trading.
Exchange Order Book
When you plan on buying or selling cryptocurrencies, the open orders of that particular trading pair are contained in an exchange order book in the form of a separate list. Think of it as a marketplace that is open for anyone to join. Those who want to sell ask for a price. And those looking to buy place bids on the asset in question.
The open order remains in the exchange order book until it is completed or canceled. An order is only executed when the seller accepts a bid or gets their asking price for the cryptocurrency. One important thing to note here is that exchange order books keep open orders in the form of trading pairs. The trading pairs may be bitcoin to USD exchange, bitcoin to ether (ETH) exchange, or similar pairing. Each pair will have a separate order book.
Cryptocurrency Order Types
With the help of different cryptocurrency order types, you can get more flexibility to target a specific buying or selling price. It helps traders minimize losses by bringing them the best end of the deal.
Let’s look at how different order types work:
Market orders are perhaps the most basic order type that instructs traders to instantly buy or sell the cryptocurrency at the best possible price. The good thing about market orders is that they are always fulfilled. It’s because the traders don’t wait for the price to hit a specific target.
Your market order will automatically match the best price available in the exchange order book. Another critical thing about market orders is that they can’t be canceled; unlike other order types, the transactions are instantly made.
The only problem with market orders is that there is no liquidity, resulting in slippage when placing large orders.
If you want to buy or sell cryptocurrency at a targeted price, you should opt for a limit order. Limit orders are only fulfilled when the cryptocurrency is bought or sold at a price specified by the buyer. But it requires a lot of patience because your order might not be fulfilled right away or at all.
On the other hand, limit orders give traders the flexibility of setting minimum prices for making exchanges. Plus, you don’t have to constantly monitor the market to get the best price as it is already predetermined.
Stop orders are bought or sold at a predetermined price. There are two types of stop orders, stop market orders and stop-limit orders.
In the case of stop market orders, a predetermined price called the stop price is set. The order is instantly executed at the next best market price when the stop price is hit.
In the case of stop-limit orders, a limit price is set. This price defines the highest possible price that traders are willing to pay for purchasing cryptocurrency. In the case of sales, the seller sets the lowest possible price at which they are willing to make a sale.
Stop orders were designed to protect the profits of traders while minimizing loss. Generally speaking, stop-limit orders are more flexible and give room to traders to buy or sell cryptocurrency with minimal losses.
Now that you’re aware of the different cryptocurrency order types, you can get more involved in crypto trading. Knowing different order types gives you more room to adopt different practices. In the end, you can choose the order type that best suits your requirements.
It is best to start with market orders as a beginner because they will always be fulfilled. It will give you a better understanding of how crypto trading works in the exchange order book. Once you start understanding the basics practically, you can opt for limit or stop orders. Keep in mind that limit orders remove market liquidity which is very important for crypto trading. But it does offer other benefits. On the other hand, stop orders, or stop-limit orders to be more precise, are a lot more complex.
By trading with different order types, you will grasp their concepts and understand the pros and cons of each order type.