What are most common Crypto Order Types? “A Comprehensive Guide to Market, Limit, Stop, and Stop-Limit Orders”

crypto order types

In trading, various types of orders allow traders to specify the conditions under which they want their trades to be executed. Here are 4 most common types of orders:

  • Market Order
  • Limit Order
  • Stop-Market Order
  • Stop-Limit Order

1- Market Order:

A market order is an instruction to buy or sell an asset immediately at the current market price. It guarantees execution but does not guarantee the execution price.

This type of order is one of the most straightforward types of orders in trading. It is an instruction to buy or sell a financial instrument, such as a stock or cryptocurrency, immediately at the best available current market price. Market orders are executed as quickly as possible, and the primary goal is to ensure that the trade gets filled.

How does market order work?

Here’s how a market order works:

  1. Placement of Order:

A trader decides to execute a market order to either buy or sell an asset. They enter the order through their trading platform, specifying the quantity (number of units or shares) they want to trade.

  1. Immediate Execution:

Once the market order is submitted, it is sent to the exchange or trading platform. Unlike some other order types, there is no specified price with a market order. Instead, the order is executed immediately at the best available prices in the market.

  1. Best Available Price:

For a market buy order, the order is filled at the lowest asking price currently available on the market. For a market sell order, it is filled at the highest bidding price.

In highly liquid markets, the difference between the last traded price and the execution price of the market order is minimal. However, in less liquid markets or during periods of high volatility, there may be more significant deviations.

  1. Quick Settlement:

The trade is settled immediately upon execution. For a market buy order, the trader becomes the owner of the purchased asset. For a market sell order, the trader receives the proceeds from the sale.

Market orders come with their own set of advantages and disadvantages, and understanding these can help traders make informed decisions about when to use them. Here are the pros and cons of market orders:

Pros of Market Orders:

  • Certainty of Execution: Market orders provide certainty of execution. Once placed, they are usually filled immediately at the best available market price.
  • Quick Execution: Market orders are executed quickly, making them suitable for traders who prioritize speed over obtaining a specific price.
  • Simplicity: Market orders are simple and easy to understand. Traders don’t need to specify a price, making them suitable for those who want a straightforward buying or selling process.
  • Effective in Liquid Markets: Market orders are most effective in highly liquid markets where there is a significant volume of buy and sell orders. In such markets, the impact on the asset’s price is minimal.

Cons of Market Orders:

  • Lack of Price Control: One of the significant drawbacks of market orders is the lack of control over the execution price. The order is filled at the best available market price, which can result in slippage, especially in volatile or illiquid markets.
  • Potential for Slippage: Slippage occurs when the actual execution price deviates from the expected price. In fast-moving markets or low-liquidity conditions, slippage can be more pronounced with market orders.
  • Not Suitable for Illiquid Markets: In illiquid markets or with thinly traded assets, market orders may result in larger price deviations and higher impact costs due to the lack of liquidity.
  • Increased Risk: Due to the lack of price control, there is an increased risk of unfavorable execution prices, particularly in situations of rapid market fluctuations.
  • Not Ideal for Large Orders: Market orders may not be suitable for large orders as they can significantly impact the market price. Traders with substantial order sizes may prefer using other order types, such as limit orders or algorithms, to manage execution more effectively.
  • Inconsistent Execution Prices: Traders may experience inconsistent execution prices, especially when the market is moving rapidly. This can lead to a less favorable average entry or exit price.

It’s important for traders to be aware of the characteristics of market orders, particularly the lack of price control, and to consider using other order types, such as limit orders or stop orders, in situations where price precision is crucial. Additionally, in illiquid markets, traders should exercise caution to minimize the impact of potential slippage.

In summary, market orders are valuable for their speed and certainty of execution, especially in liquid markets and for day trading strategies. However, they may not be suitable in illiquid markets or for large order sizes. The decision to use market orders should be based on the trader’s specific goals, risk tolerance, and the characteristics of the market being traded.

2- Limit Order:

A limit order is an instruction to buy or sell an asset at a specific price or better. A buy-limit order is placed below the current market price, while a sell-limit order is placed above it.

A limit order allows a trader to specify the maximum price (for a sell limit order) they are willing to accept or the minimum price (for a buy limit order) they are willing to pay when buying or selling a financial instrument. Unlike market orders, which are executed immediately at the best available market price, limit orders are only executed when the market reaches the specified limit price.

How does limit order work?

Here’s how limit orders work:

  1. Placement of Order:

A trader decides to use a limit order and specifies the quantity (number of units or shares) they want to buy or sell.

For a buy limit order, the trader sets a price below the current market price, indicating the maximum price they are willing to pay. For a sell limit order, the trader sets a price above the current market price, indicating the minimum price they are willing to accept.

  1. Wait for Execution:

The limit order is placed on the exchange or trading platform but is not immediately executed. Instead, it remains on the order book until the market reaches the specified limit price.

  1. Execution at or Better Than Limit Price:

When the market reaches the specified limit price, the limit order is triggered and becomes a market order.

For a buy limit order, it will be executed at the limit price or a better price if available. For a sell limit order, it will be executed at the limit price or a better price if there are matching buy orders at a higher price.

Let’s see the pros and cons of a “Limit Order”:

Pros of Limit Orders:

  • Price Control: One of the primary advantages of limit orders is that they provide traders with control over the execution price. Traders can set a specific price at which they want to buy or sell.
  • Protection Against Unfavorable Prices: Limit orders can protect traders from unfavorable price movements. For example, a trader can use a buy limit order to enter a position at a lower price or a sell limit order to exit at a higher price.
  • Partial Fills: In cases where the market briefly reaches the limit price but doesn’t sustain that level, a limit order may be partially filled. This can be advantageous for the trader.
  • No Slippage in Favorable Conditions: In favorable market conditions, where the market moves in the desired direction, a limit order ensures that the trade is executed at the specified or better price without slippage.
  • Suitable for Longer-Term Strategies: Limit orders are often favored by investors and traders with longer-term strategies who are willing to wait for specific price levels to be reached.

Cons of Limit Orders:

  • No Guarantee of Execution: The primary drawback of limit orders is that there is no guarantee of execution. If the market does not reach the specified limit price, the order may not be filled.
  • Missed Opportunities in Rapidly Moving Markets: In rapidly changing markets, where prices move quickly, a limit order may not be filled if the market skips the specified price level.
  • Potential for Partial Fills: While partial fills can be an advantage, they can also be a disadvantage if the market briefly reaches the limit price but doesn’t sustain it, leaving the order partially filled.
  • Not Ideal for Market Orders: If a trader wants immediate execution at the current market price, a limit order might not be suitable. Market orders are better in such cases.
  • Expiration Risk: Traders using time-limited limit orders (e.g., Good ‘Til Cancelled or GTC orders) should be aware that their orders may expire without being filled if market conditions don’t meet the specified criteria within the set time frame.

Limit orders are commonly used by traders who want more control over their entry and exit prices and are willing to wait for specific market conditions. They are particularly useful in situations where traders have a target entry or exit price in mind and want to avoid the potential for slippage associated with market orders.

In summary, limit orders offer control over execution prices and protection against unfavorable market movements but come with the risk of not being filled if market conditions don’t align with the specified limit. Traders should consider their specific trading goals, time horizon, and market conditions when deciding whether to use limit orders.

3- Stop Order:

A stop order becomes a market order when a specified price level (the stop price) is reached. It is often used for risk management, allowing traders to limit potential losses.

This type of order combines features of a stop order and a limit order. It is used by traders to manage potential losses and control entry or exit points in the market. A stop-limit order consists of two main components: the stop price and the limit price.

How does “Stop Order” work?

Here’s how a stop order works:

  1. Placement of Order:

A trader places a stop-market order by specifying a stop price and the quantity of the asset they want to buy or sell.

  1. Triggering the Order:

If the market price reaches or goes beyond the stop price, the stop-market order is triggered.

  1. Market Order Execution:

Once triggered, the order becomes a market order and is filled at the best available prices in the market.

  1. Immediate Settlement:

The trade is settled immediately upon execution. For a sell stop-market order, the trader becomes the owner of the purchased asset. For a buy stop-market order, the trader receives the proceeds from the sale.

Stop orders come with their own set of advantages and disadvantages. Here are the pros and cons of using stop orders:

Pros of Stop Orders:

  • Risk Management: The primary advantage of stop orders is risk management. They allow traders to set predefined exit points to limit potential losses in case the market moves against their positions.
  • Automation: Stop orders automate the execution of trades when the market reaches or goes beyond a specified stop price. This can be especially useful for active traders who may not be able to monitor the markets constantly.
  • Long and Short Positions: Stop orders can be used for both long and short positions. For long positions, a sell stop order can limit losses, and for short positions, a buy stop order can act as a protective measure.
  • Flexibility: Traders can adjust stop prices as the market moves in their favor. This flexibility allows them to lock in profits or protect gains as the trade progresses.
  • Versatility: Stop orders are versatile and can be used in various trading strategies, including day trading, swing trading, and long-term investing.
  • Prevents Emotional Decision-Making: Stop orders help prevent emotional decision-making by providing a systematic and predetermined approach to exiting positions in the face of adverse price movements.

Cons of Stop Orders:

  • Not Foolproof: While stop orders are designed to limit losses, they are not foolproof. In rapidly changing or illiquid markets, prices may skip the specified stop price, leading to slippage.
  • Slippage: Slippage can occur when the actual execution price deviates from the specified stop price. This is more likely in volatile market conditions.
  • Partial Fills: Stop orders can result in partial fills if the market briefly reaches the stop price but does not sustain that level. This can leave the trader with only a portion of the intended order executed.
  • Market Gaps: During periods of extreme market volatility or gaps (sudden jumps in price), stop orders may be filled at significantly different prices than the stop price, especially if there are no intervening prices available.
  • Market Order Risk: Stop-market orders, when triggered, become market orders and are filled at the best available prices. In highly volatile markets, this could result in unfavorable execution prices.
  • Dependence on Market Conditions: The effectiveness of stop orders depends on market conditions. In rapidly changing markets, they may not be as reliable, and in illiquid markets, execution may be challenging.

In summary, stop orders are valuable tools for managing risk and automating trade execution, but traders need to be aware of their limitations, particularly in terms of slippage and potential partial fills. The decision to use stop orders should be based on the trader’s specific goals, risk tolerance, and an understanding of market conditions.

4- Stop-limit Order:

This order combines elements of a stop order and a limit order. It triggers a limit order when the stop price is reached, specifying the maximum or minimum price at which the trade should be executed.

Stop-limit orders are commonly used for risk management. They allow traders to set a predefined exit point (stop price) to limit potential losses and also specify the price at which they want the order to be executed.

How does “Stop-limit Order” work?

Here’s how a stop-limit order works:

  1. Placement of Order:

A trader places a stop-limit order by specifying both the stop price and the limit price. For a sell stop-limit order, the stop price is set below the current market price, while the limit price is set at or above the stop price. For a buy stop-limit order, the stop price is set above the current market price, and the limit price is set at or below the stop price.

  1. Activation and Execution:

When the market reaches the stop price, the stop-limit order becomes a limit order and is added to the order book. The order is then executed at the limit price or a better price if available.

  1. Control Over Execution Price:

The trader has control over the execution price with a stop-limit order. However, there is a risk that the limit order may not be filled if the market moves rapidly through the specified limit price.

Pros of Stop-Limit Orders:

  • Pros: Risk Management: Effective tool for managing potential losses by setting a stop price.
  • Control Over Execution Price: Provides control over the price at which the order is executed.
  • Useful in Volatile Markets: Suitable for use in volatile markets where prices can change rapidly.

Cons of Stop-Limit Orders:

  • Possibility of Non-Execution: There is a risk that the limit order may not be filled if the market moves quickly through the specified limit price.
  • Complexity: Stop-limit orders can be more complex than market or limit orders, and traders need to carefully set the stop and limit prices.
  • Partial Fills: Like limit orders, stop-limit orders can result in partial fills, especially in fast-moving markets.

“Stop-limit orders” are utilized by various types of traders who want to manage their risk and control entry or exit points in the market. In general, traders and investors use stop-limit orders when they want to manage risk, protect profits, or automate trade executions based on specific price levels. The use of stop-limit orders can vary based on individual trading strategies, risk tolerance, and market conditions.