TL;DR
When trading stocks or cryptocurrencies, you interact with the market by placing orders:
A market order is an instruction to buy or sell immediately (at the current market price).
A limit order is an instruction to wait until the price reaches a limit or better price before executing
That's the general description of the order. Of course, each of the two categories has different variations that perform different actions, depending on how you want to trade. Curious? Continue reading.
Introduction
Have you registered with an exchange, and are you curious about the functions of the various buttons? Maybe you've finished re-watching the movie Wall Street and are trying to understand how the stock market works better?
In the following article, we will outline orders: instructions you send to an exchange to buy and sell assets. As we will see in a moment, there are two main types: limit orders and market orders. However, these are just qualities used to describe various commands.
Let's take a deeper look.
Market order vs. limit order
Market orders are orders that will be executed immediately. In essence, the order is at the current price, do x. For example, you are on Binance and want to buy 3 BTC and Bitcoin is trading at $15,000. You are willing to pay $45,000 to get the coin and don't want to wait until the price drops any lower. So, you place a buy market order.
Then, who sold the coins? We need to look at the order book to find out. The order book is where the exchange keeps a large list of limit orders which are simply orders that are not executed immediately. The order is something like at price y, do x.
In this example, another user may have placed an order previously asking the exchange to sell 3 BTC when the price reaches $15,000. So, when you place a market order, the exchange will match it with the limit order on the book.
Technically, you haven't created an order – instead, you've filled an existing order, then removed it from the order book. This action makes you a taker because you have taken some liquidity from the exchange. However, another user became a maker because he added liquidity to the exchange. Generally, you get lower fees as a maker because you provide benefits to the exchange.
The relationship between these two players is explored in more detail in Market Makers and Market Takers Explained. Read the article if you want to get a better understanding of how exchanges work.
Things you need to know about market orders
The basic types of market orders are buy and sell. You instruct the exchange to execute the transaction at the best price available. Note that the best available price is not always the value displayed – it depends on the order book, so you may end up executing a trade at a slightly different rate.
Market orders are suitable for instant (or near-instant) transactions. That's what you need to know. The costs that arise from slippage and exchanges make the same trade cheaper if done with a limit order.
➟ Want to start your crypto adventure? Buy Bitcoin on Binance!
Various common order types
The simplest orders are a buy market order, a sell market order, a buy limit order, and a sell limit order. However, if you only focus on these four things, your trading experience will be hampered. Instead, you can use the other orders below to take advantage of market conditions, both for short and long term setups.
Stop-limit order
Stop-limit orders are a great tool to limit the losses you can incur on a trade. This order type allows you to set a stop price and a limit price. For example, BTC is trading at $10,000, then you set a stop-limit order with a stop price of $9,900 and a limit price of $9,895. A limit order at $9,895 will be placed when the price falls by $10.
However, orders are only placed once the stop price is reached. You still run the risk of the price not recovering. In this case, you have no protection if the price continues to fall below $9,985 and the order may not be filled.
One-cancels-the-other (OCO) order
“One cancels the other” (OCO) order is a powerful tool that allows you to combine two conditional orders. As soon as one condition is triggered, the other condition will be cancelled. If we take the example of BTC at $10,000, you can use an OCO order to buy Bitcoin when the price reaches $9,900 or sell it when the price rises to $11,000. One of these two conditions will be executed first. This means that the second condition will be canceled automatically.
What is time in force?
Another important concept to understand when talking about orders is validity period. These are the parameters you set when opening a trade that determine the terms before which it expires.
Good ‘til canceled (GTC)
Good 'til canceled (GTC) is an instruction that specifies that a trade should remain open until it is executed or canceled manually. Generally, cryptocurrency trading platforms set this option by default.
In the stock market, one common alternative is to close orders at the end of the trading day. However, considering that the crypto market operates 24/7, GTC is becoming more prevalent.
Immediate or cancel (IOC)
Immediate or cancel (IOC) orders specify that any portion of the order that is not fulfilled immediately must be cancelled. For example, you send an order to buy 10 BTC at $10,000, but you can only get 5 BTC at the execution price. In that case, you will buy those 5 BTC and the rest of the order will be closed.
Fill or kill (FOK)
Fill or kill (FOK) orders will be filled immediately, or terminated (cancelled). If your order instructs the exchange to buy 10 BTC at $10,000, the order will not be partially filled. If the entire order of 10 BTC is not immediately available at that price, the order will be cancelled.
Closing
Mastering all order types is essential for smooth trading. Whether you want to use stop orders to limit potential losses or OCO orders to plan for multiple outcomes simultaneously, understanding the trading tools available to you is important.