Trading on an exchange is actually not such a difficult thing as coaches and brokers usually describe it. That’s why a lot of self-taught people with no special education are engaged in it. But this field does have many specialized terms that scare novice users off. Today we’ll explain what limit and market orders are, and how and when they are used.
You come to an exchange to sell/buy stocks or cryptocurrency. To denote the deals that you’re going to conduct the term order is used (comes from English ‘order’):
This is the ‘essence’ of orders. Of course, there are many other peculiarities and nuances in market and limit orders, but we’ll tell you about them further.
In fact, an order is a simple algorithm of what should be done with your assets. For example, ‘to sell all the bitcoins at an actual price’ is a market order. While ‘to buy ethereum when the price drops to $2000’ is a limit order. Having chosen the proper order, you can ‘insure’ yourself from the losses on the market.
But what’s happening when you set a limit order to purchase/sell assets? Let’s see an example.
You desire to purchase 5 Ethereum on a cryptocurrency exchange the market price of which is 2000 US dollars. You don’t want to wait till the price drops and you set a market order for the purchase of 5 Ethereum. After that, your order is compared with an order book: the book contains all the limit orders published on the exchange. Because someone might have set an order: ‘To sell Ethereum when its price reaches $2000’.
Your market order is not added to the book: it kind of fills the limit one with which it coincides. Next, the deal itself takes place where you are a taker (the person who has taken the part of the exchange liquidity), while the author of the limit order is a maker (he increased it instead). Usually, makers have lower commission fees for deals since this is them who make the revenue for the exchange.
I.e. by publishing your market order, you close someone’s limit order: this is how the exchange brings together people ready to make a deal. And it seems that we can end with that – there are limit/market orders to buy/sell that interact one with another, but…
Simple market and limit orders are fully enough for your start. However, as your experience grows, you will need to learn how to use other tools as well. Just like a kid who’s learning how to read: at the beginning he does it using books with numerous pictures and illustrations but then he proceeds to more complex texts. The same is with you: starting from simple market and limit orders, you’ll end up using more complex and accurate tools.
As it goes from the name, this type of orders is used to protect your assets from losses. In fact, that is a subtype of a market order that automatically fixes your losses in case of an unexpected situation. The main feature of such an order is that it is not added to the general order book. Let’s see an example again:
You want to set a market order to purchase company stocks that are traded for 50 dollars – it seems that they will go up and you’ll be able to earn. But the market is unpredictable, and the situation may turn the other way round, and if stocks start falling, you will lose money. To keep losses under control, you set a stop-loss order at 45 dollars. Now you can easily go to sleep and not worry about a hasty decision made on emotion: the stop-loss order (in case of market reversal) will reduce your losses to 5 dollars.
Also, (since the sale order will be a market one) a stop-loss order may fix losses a bit higher than you wanted. Continuing the analogy from the example, if no one wants to buy falling stocks at 45 dollars, the price is going to be set at a market price, as close to the stop-loss as possible – 44,5 dollars or 43,8, depending on the situation.
One more convenient tool for any trader that allows you to purchase stocks at that very price you expected to, although not guaranteed. It is somehow similar to stop-loss orders, but if it requires setting only one parameter, stop-limit orders have two parameters. Let’s proceed to the example:
The stocks of a well-known company currently cost 100 dollars and may grow in price. You want to ‘catch’ them at a point of 110 dollars (or it may be cheaper, but not exceeding it) and buy them. For that purpose, you set a stop-limit order: a stop-price at a level of 105 dollars, and a limit one at a level of 110. Now when the price goes higher than 105, your order will be written to the order book: ‘To buy stocks at a price not higher than 110 dollars’. Here you go: you get the stocks at a needed price, without any ‘slippage’.
The problem here is that if the price goes up too fast (for example, when trading cryptocurrency), there won’t be the counterpart to your limit order; it means that the moment would be lost. A similar thing happens when it comes to the insurance when the stocks drop – if there is a short interval between the stop-price and limit-price, you won’t be able to sell your assets during the fall.
This abbreviation in translation from English means ‘one-cancels-the-other’. These are two interrelated orders execution one of which automatically prohibits the action of another. This method may be used both for complex (stop-loss and stop-limit) and simple orders (two limit orders). For instance, the price of Ethereum is 2000 dollars. You may set two limit orders (‘to sell at 2200’ and ‘buy at 1800’), having connected them into one OCO order. This allows automating operations with assets without worrying about their safety. The main thing here is to set the commands correctly.
This is the last thing that a beginner trader should learn during the course of ‘a starting trader’. Each order has got its own execution time that you mention when opening a deal. There are three types that you may set: GTC, IOC, and FOK:
This is a comfy option but if you’re inattentive (for example, you forgot about the order opened a long time ago that had worked out at an unwanted time) this ‘convenience’ may cost you a good sum of money.
Surely, in this article, we’ve covered not all types and peculiarities of orders: professional traders have got more ways to manage their assets. However, this knowledge is fully enough to start and get the feel of exchange trading. And it doesn’t matter which orders you apply, what matters is how meaningfully and for what you do this.