Résumé
When you trade stocks or cryptocurrencies, you interact with the market by placing orders:
A market order is an immediate buy or sell instruction (at the current market price).
A Limit order is an instruction to wait until the price reaches a limit or better before being executed.
This is the basics of orders. Of course, each of these two order categories each have different variations that allow different things, depending on how you want to trade. Are you curious? Keep reading.
Introduction
Are you registered on an exchange and wondering what the different buttons on the trading interface are for? Maybe you've finished watching Wall Street for a second time, and you're trying to better understand how stock markets work?
In the following article, we'll break down the different types of orders: the instructions you send to an exchange to buy and sell assets. As we will soon see, there are two main types: Limit orders and Market orders. However, these are just characteristics used to describe an order type.
Let’s dig deeper.
Order Market or Order Limit
Market orders are orders that you want to execute immediately. Essentially, they are saying at the current price, do x. Let's say you are on Binance, you want to buy 3 BTC, and the current price of Bitcoin is $15,000. You are willing to pay $45,000 for these coins and don't want to wait for the price to drop, so you place a buy order at the market.
You are probably wondering: “who sells these tokens?” ". We need to consult the order book to respond. This is where the exchange keeps a large list of all Limit orders, which are actually orders that are not executed immediately. This is an instruction that says at price y, do x.
As an example, another user may have placed an order earlier telling the exchange to sell 3 BTC when the price reached $15,000. So, when you placed your Market order, the exchange associated it with a Limit order from the book.
In fact, you did not create an order, but you filled an existing order, deleting it from the order book. This makes you a taker, because you have withdrawn part of the liquidity from the exchange. The other user, on the other hand, is a maker, because he has created liquidity. Typically, you benefit from reduced fees as a maker because you are beneficial to the operation of the exchange.
The relationship between these two players is more detailed in the section Market makers and market takers explained. Do not hesitate to read it if you want to have a better understanding of how an exchange works.
What you need to know about Market Orders
The main types of Market orders are buy and sell. You ask the exchange to complete a transaction at the best available price. Note that the best available price is not always the value currently displayed. It depends on the order book, so you might end up executing your trade at a slightly different price.
Market orders are suitable for instant (or near-instant) trading. But that's about all. The fees generated by the slippage and those charged by the exchange mean that the same trade would have been cheaper if it had been made using a Limit order.
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Common Order Types
The simplest orders are buy market orders, sell market orders, buy limit orders, and sell limit orders. However, if you only stick to these, you will end up with a somewhat limited trading experience. Instead, you can rely on these elements to take advantage of market conditions, whether in short-term or long-term setups.
Order Stop-limit
Stop-limit orders are another great tool for limiting the losses you can incur on a trade. This type of order allows you to set a Stop price and a Limit price. If BTC was trading at $10,000 and you set a stop-limit order at a Stop price of $9,900 and a Limit price of $9,895. Then, a Limit order at $9,985 will be placed when the price drops by $100.
Note, however, that the order is only placed once the Stop price is reached. You still run the risk that the price may not recover, in which case you have no protection if it continues to dip below $9,985, and the order may not fill.
One-Cancels-the-Other (OCO)
A One Cancels the Other (OCO) order is a sophisticated tool that allows you to combine two conditional orders. As soon as one of them is triggered, the other is canceled. If we take the example with BTC at $10,000, you can use an OCO order to buy bitcoins when the price reaches $9,900 or to sell bitcoins when the price reaches $11,000. One of the two will be executed first, which means the second will be automatically canceled.
What is a Time in force “Validity time” order?
Another important concept to understand when talking about orders is validity time. This is a parameter that you specify when you place an order and which determines the expiration conditions of the order.
Good 'til canceled (GTC)
The term Good 'til canceled (GTC) refers to an order that will remain open until executed or canceled manually. Typically, cryptocurrency trading platforms choose this option by default.
In stock markets, a common alternative is to close the order at the end of the trading day. As cryptocurrency markets operate 24/7, GTC orders are much more widespread.
To execute immediately or cancel (Immediate or cancel - IOC)
An Immediate or cancel (IOC) order states that if any part of the order is not executed immediately, it must be canceled. Let's say you placed a buy order for 10 BTC at $10,000, but you could only get 5 BTC at that execution price. In this case, you would buy these 5 BTC, and the rest of the order would be canceled.
Immediate full execution or cancellation (Fill or kill - FOK)
Fill or kill (FOK) orders are either fully executed or eliminated (cancelled). If your order asked the exchange to buy 10 BTC at $10,000, it would not be partially executed. If the entire order of 10 BTC is not immediately available at this price, it will be canceled.
To conclude
Mastering order types is essential to trading well. Whether you want to use Stop orders to limit the risk of loss or OCO orders to plan for different outcomes simultaneously, it is essential to be aware of the trading tools available to you.
