When trading, there are many different ways to place an order. It is important you understand the different types of orders available to you and the pros / cons of using them.
The Simple: Market Order
A market order is exactly as it sounds; you are either buying or selling at the current ‘market price’ as shown on your screen. This is the easiest way of placing an order, execution is immediate and you see the transaction occur as soon as you place it. However, you need to know how orders get executed to make sure you are transacting at your expected price.
If you look at the below market depth data from CEX.IO BTC/USD, the last transaction price was at $496. If, for example, I placed a market order to buy $2,000 of BTC thinking, I would get $496 as my price I would be wrong. My market order will execute, but it will go through the price levels shown under ‘Sell Orders’ until all $2,000 is consumed. That means I would buy at the various prices up to $500 as my order consumes the limit sell orders sitting in the market depth. This would give me an average buy price around $498 and not $496. This price difference is sometimes referred to as ‘slippage’.
The Useful: Limit Order
A limit order enables you to control exactly the price you wish to transact at. For example, I have already purchased $2,000 of BTC at an average price of $498 (in the above example). I am looking to make a 10% profit on a potential price increase, I don’t want to watch the market each day so I use a limit sell order which will sit in the market depth at my requested sell price and it will only execute once price action reaches my limit price (again remember the whole value will only execute if there is enough value transacted at my limit price). So, I place an order to sell my BTC at $547.80. Because it is a limit order I know the price will transact at that price or better, so there will be no surprises as there can be with Market Orders.
Alternatively a Limit Buy order means I can enter an order to buy at a specific price. I would use this type of approach if I expected for example BTC price to fall from its current level, so I enter a limit buy at a price lower than the current market, it will execute if and when market price reaches my limit again with enough value to transact my order.
In the below chart you can visually see where a limit buy and limit sell order would be used. I expect price to go down, so I enter a Limit Buy Order at $460. Market price does go down to that area and my order executes. I then enter a limit sell order as I expect price to rise, I set the Limit Sell Order at $475. Price rises and my order executes. No need to watch the market, my order sits in the market depth and executes according to my plan.
Remember, a Limit Order will sit in the market depth until you cancel it, so make sure you keep track of your Active Orders (located under the market depth data on the CEX.IO trade page).
What Is A Stop Order?
A Stop Order is similar conceptually to a Limit Order, however the key difference is that once the market price reaches a price where a Stop Order resides that Stop Order turns into a Market Order and will execute at the best possible price in the same way as described earlier in ‘Market Orders.’ With such an order ‘slippage’ may well occur. Thus a Stop order will guarantee to be executed (but at potentially variable prices), whilst a Limit order will not encounter slippage, but it may not execute the full quantity.
CEX.IO Orders and Future Plans
The CEX.IO Crypto Exchange offers Market and Limit Orders for its users. As we continually develop the tools available on the exchange we will look to add further resource for traders such as Stop orders, Price Alerts, Automatic Limit Order cancellation, Automatic Limit Sell order entry upon successful buy order, etc.
Depending on your strategy and plans you may use all or just one type of order at your disposal. Understanding how each order type works will enable you to ensure there are no surprises when and if your orders execute.
Finally, we encourage interaction and your input, perhaps you would like a certain topic covered, or you might have a view on one of the topics discussed. Whatever it may be please feel free to add your comments.
by Michael Whitehorn for CEX.IO