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Types of Orders

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Introduction

When you trade stocks or cryptocurrencies, you interact with the market by placing orders:

  • Market Order: This is an instruction for an immediate purchase or sale at the current market price.
  • Limit Order: This is an instruction to wait for the order to be executed until the price reaches a specified or more favorable value.

Definition of Market Order

A Market Order is a type of order that involves an immediate purchase or sale of an asset at the current market price. To execute it, there needs to be sufficient liquidity in the market, as the Market Order will be fulfilled based on existing Limit Orders already placed in the order book. When you want to buy or sell an asset instantly at the best available price, placing a Market Order is the optimal choice. For instance, if you want to buy BNB and believe its price may rise rapidly, you agree to the current market price and place a Market Order on the chosen exchange for immediate execution.

How Market Orders Work

The way market orders function is distinct from limit orders, as they are executed instantly at the prevailing market price, without any waiting for matches with other orders in the order book. When you submit a market order, you are accepting the ongoing price in the market. For instance, if you place a market order to buy, the exchange will execute it at the lowest available asking price in the order book. Conversely, a market order to sell will match the highest available bid price. Nonetheless, it's crucial to understand that putting a market order reduces the liquidity on the exchange since it is immediately executed at the current market price. Consequently, market takers, who use market orders, generally pay a higher fee compared to market makers, who utilize limit orders to provide liquidity to the market. Fee structures like the one implemented on the Cronex exchange facilitate the easy observation of the difference between maker and taker fees. This incentivizes traders to offer liquidity and use various order types based on their individual trading strategies and requirements.

Market order example

Let's consider an example to illustrate the relationship between market makers and market takers using specific figures. Suppose you want to buy 1 BTC, and the current market price is approximately $30,000 USD. Go to the Cronex exchange and open the BTC/USDT trading pair. To create a market order for buying, enter the amount and click "Buy BTC." After placing the order, the exchange checks the order book. This register contains limit orders with specific prices for buying and selling the asset. In this case, your market order to buy 1 BTC at the market price will be matched with the minimum limit sell order in the order book. As you can see, the lowest limit sell order in the book is for 7.04544 BTC at a price of $30,000.00 USD (BUSD). Your market order to buy will purchase 1 BTC from the available 7.04544 BTC at the price of $30,000.00 USD. Now, let's assume you want to buy 500 BTC at the current market price. The cheapest available limit sell order will not be able to execute your entire market buy order. The remaining volume of your market order will be automatically matched with other limit sell orders, moving up the order book until it is completely filled. This process is called slippage, and it is why market takers pay higher fees (or receive a lower price). So, the market order allows you to execute your trade instantly at the best available price in the order book, but for larger orders, there might be partial executions due to the available liquidity in the market.

Market orders and limit orders

In essence, limit orders empower traders with the flexibility to establish their preferred buying or selling price for a financial asset. The order is meticulously crafted to execute either at the specified price or at a more advantageous rate if one becomes available in the dynamic market. Traders can also opt for partial executions, ensuring only a portion of the order is filled if the market conditions are not fully favorable. Diverging from market orders, which demand instant execution at the prevailing market price, limit orders endow traders with a sense of control over their trades. This strategic approach allows them to pre-plan their transactions, meticulously evaluating market conditions and crafting orders that match their specific criteria without necessitating active involvement during the execution process. The benefits of employing limit orders in trading are profound:

  1. Protection Against Market Volatility: In the tumultuous waters of highly volatile markets, resorting to market orders can be akin to navigating stormy seas blindfolded. Rapid price fluctuations can lead to unforeseen outcomes. In contrast, limit orders act as a protective harbor, ensuring trades are executed at the desired price or even better, should favorable market conditions arise.
  2. Resilience in Low-Liquidity Markets: Limit orders prove to be invaluable in markets where liquidity is scarce. Such environments with few market makers could trigger slippage when executing market orders, resulting in unfavorable prices. However, traders utilizing limit orders can avoid this pitfall, as their orders are solely executed at the specified price.
  3. Strategic Empowerment: Limit orders cater perfectly to traders equipped with a coherent and methodical strategy. With this tool at their disposal, traders can tactically plan their trades in alignment with their well-defined strategy, giving them the liberty to implement their plan automatically without constant monitoring. This contrasts with market orders, which lack the finesse and flexibility to adhere to specific strategies and require swift action at the moment of execution.

When to Use Market Orders?

Market orders are most suitable when you prioritize swift order execution, and the final price is not the primary concern. Their usage may lead to slippage and potentially higher prices, so it's essential to be prepared for such potential drawbacks. Market orders are particularly useful when time is of the essence. For instance, if you already have a limit stop order in place but urgently need to buy or sell an asset, market orders can come to the rescue. However, if you have experience with cryptocurrencies and wish to purchase several altcoins with your Bitcoin, it's better to avoid using market orders to avoid the risk of paying an inflated price. In such cases, limit orders are more preferable. When trading highly liquid assets with narrow bid-ask spreads, market orders may offer a closer execution price to what you expect. Nevertheless, assets with wide spreads may pose a higher risk of slippage, making limit orders a better choice in such scenarios.

Disadvantages of Using Market Orders

Despite the advantage of quick execution, market orders have limitations and disadvantages:

  1. High slippage in low-liquidity markets: Market orders can encounter issues with assets that have low trading volumes, leading to unexpectedly high slippage. As a result, you may end up paying significantly more or receiving less profit than planned, especially if there is insufficient liquidity on the exchange.
  2. Lack of pre-planning: Market orders require immediate decision-making and instant entry into the market. You cannot pre-plan a trade and execute it automatically in the future if you are unavailable or not monitoring the market at that moment. If the market starts moving against your position during your absence, you won't be able to place a market order and may miss the opportunity to protect your position or secure your profits.

What is a limit order

A limit order, with its unique characteristics, empowers traders by offering them precise control over their buying or selling prices when dealing with financial assets. This type of order is distinct from market orders as it allows traders to set specific price criteria, enabling them to wait for more advantageous market conditions. When a trader places a limit order, it becomes part of the exchange's order book and waits for the market price to reach or surpass the designated limit price. This distinctive feature sets it apart from market orders, which are executed instantly at the prevailing market price. The versatility of limit orders enables traders to make well-informed decisions based on their desired entry or exit points. It allows them to carefully plan their trades, especially in highly volatile markets, by targeting specific price levels to execute their orders. Moreover, limit orders can serve as valuable tools for implementing various trading strategies. Traders can set limit orders to capture potential price reversals, take advantage of price fluctuations, or strategically enter or exit positions at predetermined levels. Despite these unique advantages, it's essential to bear in mind that there are no guarantees of execution with limit orders. If the market fails to meet the specified limit price, the order may remain pending or unfilled. Therefore, traders need to exercise diligence in analyzing market trends and selecting appropriate limit levels to optimize the likelihood of successful trades.

How does a limit order work?

After a limit order is confirmed, it is uniquely positioned in the order book, patiently waiting for the opportune moment to execute. Unlike market orders that get filled instantly at the prevailing market price, a limit order will only be triggered if the market price reaches or exceeds the specific limit price set by the trader. Let's consider a scenario where you decide to sell 1 BTC at $31,000 while the current market price hovers at $30,000. Placing a limit sell order for 1 BTC at $31,000 means that the order will remain dormant until the market price of BTC rises to meet or surpass the $31,000 limit. Once that happens, the limit order will be dynamically matched with available buyers in the market, and the trade will be executed accordingly, ensuring you get the price you desired. It's worth noting that the order of execution for limit orders is determined by the time of their placement in the order book. So, when the market reaches the desired limit price, your limit order will be fulfilled based on its position in the queue of orders. However, traders need to be mindful of the time validity of their limit orders. Typically, these orders are active for a predetermined period, often up to 90 days. Monitoring the market regularly is crucial as its volatility can lead to price fluctuations. For instance, if you set a limit sell order for 1 BTC at $31,000 while the current market price is $30,000 and after a week, the market price surges to $32,000, your limit order will be triggered as the market surpasses your specified price. Thus, being aware of market conditions and adjusting limit orders when necessary is essential to optimize trading strategies and achieve desired outcomes.

When to use a limit order

Limit orders can be utilized in various situations:

  1. When you wish to buy or sell an asset at a specific price, which may differ from the current market price.
  2. When you have the flexibility to wait for the market to reach your desired price level before executing the trade.
  3. When you aim to secure potential profits or minimize potential losses by setting a predefined price for the trade.
  4. When you prefer to split your orders into smaller limit orders, following the Dollar-Cost Averaging (DCA) approach. It's important to note that even if the market price meets your specified limit price, the execution of the order is subject to market conditions and liquidity. In some cases, the limit order may only be partially fulfilled. By employing limit orders, traders can have more control over their trading strategies and make informed decisions based on their desired price levels. It allows for a more precise approach to entering or exiting positions, especially in markets known for their volatility. However, staying attentive to market dynamics and adapting the limit order strategy accordingly is crucial for achieving optimal results.

How to place a limit order on Cronex

To place a limit order on Cronex and buy BTC at a lower price than the current offering, follow these steps:

  1. Log in to your Cronex account and navigate to the Trading tab.
  2. Use the search bar on the right side of the screen and enter "BTC". Select the trading pair USDT.
  3. Click on [Limit], then enter the desired amount you want to buy. You can also set the purchase amount using percentage buttons to easily place a limit order for 25%, 50%, 75%, or 100% of your balance. Click [Buy BTC] to place the order.
  4. After confirming, the limit order will appear in the order book on the right side of the screen.

To monitor your active orders, simply scroll down to the "Open Orders" tab on Cronex. Remember that the execution of a limit order depends on whether the market price reaches the specific limit price you set. Should the market fail to meet that price level, your limit order will remain open, awaiting the right conditions. The limit order is a powerful tool in trading, empowering you to buy or sell coins at a predetermined price. This feature is designed to assist traders in maximizing potential profits or mitigating potential losses. However, it is crucial to conduct thorough research on the various order types available and carefully evaluate which option best aligns with your unique portfolio and trading strategy. Making a well-informed decision will significantly enhance your chances of achieving successful trading outcomes.