In simple terms, trading is the buying and selling of assets stocks, commodities, or cryptocurrencies to make a profit. When people trade, they exchange one asset for another, with plans to sell at a higher price than what they paid.
Trading is a key driver of the crypto space but it’s not as straightforward as the definition may seem. That’s right, crypto traders actually get to choose between different types of orders to execute their trades. These orders determine the how and when of transaction execution essentially giving traders more control over their strategies and the potential risks.
Building on the earlier explanation, trading orders are instructions a trader gives to buy or sell a particular token. The order states the price and quantity the trader is willing to deal with. This way, traders can enter or exit positions in the market based on criteria they choose such as a specific price range. Traders can also automate their trading by placing orders that will go through once the specified conditions are met saving them time and effort.
Crypto traders have a range of order types that they can choose from. However, we will be focusing on two of the most common ones which are;
Limit orders let traders state the minimum price they’ll accept when selling or the maximum price they’ll pay when buying. These orders give market participants more control over their trades although they might take more time. They will only carry through when the market price hits the trader’s preferred price. That means they get to buy at a price lower than the current price level or sell at a price higher than the current market price.
With limit orders traders don’t have to stay watching the market or worry about missing an opportunity. The automation grants them a lot of freedom, however, there’s no guarantee that the market will hit the limit price, so the trade may not be executed.
For instance, a trader could submit a sell limit order for BTC. The trader sets a limit of $27,000 but the token’s current market price is $26,760. If BTC does not hit the $27k price level, the order will not be executed. If it does but there are sell orders ahead of the trader’s, those orders will be executed first. Also, limit orders have an expiration date of up to 90 days. If the order has not been executed after the date, it will be canceled.
The crypto market generally experiences frequent price swings so it’s important for traders to review open limit orders from time to time. Like in the example above, should BTC’s price hit $27.5k, the trade would still be executed at $27k but the trader’s profit would be limited by the price they set. So, once more it’s a good idea to check in from time to time.
When a trader places a market order, they mean to sell or buy at the current market price. Here, the speed of execution is the priority and the trader is guaranteed almost immediate entry or exit from a trade. With a market order, you’re basically requesting to enter or exit at the best available price in the market, and the trade usually takes place within seconds. It’s important to note that the exact execution price may vary due to market fluctuations.
Let’s paint a clear picture of what a cryptocurrency market order is like. If you wanted to sell perhaps your BTC at the current market price ($26,761 at writing time), when you place a sell market order it would be executed instantly at this price. However, it might drop or increase depending on how the market moves.
Market orders are pretty much guaranteed to be executed especially in a liquid market, and with this model as well, traders do not need to constantly monitor the market. They offer convenience and are very efficient. They also do not have an expiration date, that is they stay active until completion or until the trader cancels the order.
One downside to market orders is the volatility of the market, a fast-moving market or wild swings in price may mean the execution price may be a good distance from the expected market price.
Choosing between limit and market orders in crypto depends on the trader’s specific needs and preferences. Factors worth considering include
Can limit orders be canceled or modified?
Yes, traders can cancel or modify limit orders according to their changing needs.
How does market liquidity affect limit order execution?
Market liquidity impacts the speed and likelihood of limit order execution
Can market orders be used for buying and selling cryptocurrencies simultaneously?
No. To buy and sell cryptocurrencies simultaneously, a trader would separate market orders for each action.