There are lots of various kinds of warrants involved in crypto trading. It is useful to have an understanding of them, otherwise you may miss out on favorable trading opportunities. This quick guide provides an overview of all types of orders in crypto trading.
What types of orders are there?
When you buy cryptocurrency, you are essentially placing an order (warrant). You specify how many units of cryptocurrency you want to buy and how much you are willing to pay for them. Once the order is placed, the exchange finds a seller willing to sell you that cryptocurrency at a set price.
What types of orders are there and how do they differ? The main types of orders involve:
- LMT or Limit order.
- MKT or Market order.
- STP or Stop order.
- Stop limit order.
Limit order
A limit warrant is a standard order: most crypto traders use this type of order without even realizing it. With a limit order, you set in advance exactly what you want to buy (or sell) and at what price. For example, you might buy two ETH units at a cost of $1601 per coin. The current exchange rate is $1604 per ETH.
The price of Ethereum can fluctuate; when the price reaches the set price of $1600, the crypto exchange guarantees the automatic purchase of two Ethereum coins. The same scheme is used to sell cryptocurrency: you set a price at which crypto coins can be sold. When the price reaches this value, the exchange automatically sells the cryptocurrency.
The advantage of a limit order is that you don’t need to monitor the price of cryptocurrencies, and you can buy or sell them at fixed prices.
However, a limit order has its disadvantages. It may happen that the value of a particular cryptocurrency doesn’t reach the predetermined price, or it may turn out that you could have made a much higher profit.
Suppose you want to buy Ethereum for $1600 and a few days after the purchase, the price of Ethereum drops to $1567 and you are disappointed that you set a market limit warrant.
Market order
A market warrant represents a kind of order that you use to buy or sell cryptocurrencies at the market price in effect at that moment. You do not specify a specific price, but rather the number of units of a particular cryptocurrency you wish to purchase. The exchange then sells or buys that quantity at the first best market price.
Suppose you wish to purchase four Bitcoins without setting a price in advance. The value of Bitcoin at that moment is $21,392. By placing a market order, you indicate that you want to buy four BTC coins, and then the cryptocurrency exchange buys the four coins at the market price. You pay out $85,568 for the four Bitcoins.
The same scheme applies when you want to sell Bitcoins. If the market price at the time of sale is $20,568 and you indicate that you want to sell 3 BTC, the exchange immediately sells those coins at the market price.
The advantage of a market order is that it works quickly and easily. If you want to get rid of a certain cryptocurrency immediately, it is best to use a market order.
Stop order
A stop warrant can be confused frequently with a limit warrant. In contrast to a limit warrant, by means of a stop order you specify at what value to purchase or dispose of a digital currency. This makes it different from a limit order, where you can specify a fixed limit.
Within a stop order, you can set an execution period: for example, you can specify that the stop order applies only today.
There are two kinds of stop orders: a stop loss and a stop limit warrant. Below we will discuss the difference between these two types of cryptocurrency orders in detail.
Stop loss order
Stop loss warrant is more advanced. A limit order gets posted auto and this can lead to a loss. A market order is very simple because it uses the market value of the digital currency when you purchase or sale the crypto.
Using a stop loss warrant, you can react faster and more efficiently to changes in the price of the cryptocurrency. An order of this type is designed to limit losses.
Let’s say you have 1,500 XRP units with a value of €0.50. You are afraid that the value of Ripple will fall, in which case you want to limit your losses as much as possible. You can position a stop loss warrant at a price of €0.47. When Ripple falls to €0.47 or below, the coins are automatically sold. In this respect, a stop loss is very similar to a limit order, although a stop loss is mainly meant to limit losses.
You can also place a stop loss warrant based on a percentage decrease. For example, you can set up to sell a certain cryptocurrency after a 2% drop. Thus, a stop loss is much more advanced to use than a limit warrant.
Stop limit order
The price of cryptocurrencies can fall and rise very quickly. No one is surprised to see Bitcoin grow in value by 10% in 24 hours. All the orders described above are controlled automatically, and their execution may not take into account the rapid price drop, which needs to be corrected.
A stop-limit order makes it much easier to react to a price correction. You specify both the stop loss level and the cap level. This way, you can ensure that the cryptocurrency will sell at a certain price.
Let’s say you have Litecoin with a value of €185. You can set the limit at €170 and the stop loss level at €180. The moment the value of Litecoin falls to a level below €180, the stop loss will be activated. In this case, the limit order is set at the level of €170. This means that Litecoin will be automatically sold when its value falls to a level below €170 or rises to a value above €180.
What is the best warrant kind to utilize to trade crypto?
As we have found out, there are four different types of orders in cryptocurrency trading. There is no single answer to the question of which order type to use. It is important that the type of order matches the nature of your investment operations.
A trader who has little time to monitor prices will utilize other kinds of orders than a trader who is able to constantly watch prices.
It is advisable to make sure that you know how a particular order type works and then experiment with it. You can do this by using only a small amount of cryptocurrencies at first. This way, you will learn how to use certain types of orders and understand what types of orders are right for you specifically.
Once you have mastered all the techniques, you will be able to move on to larger trading operations. When placing an order, it is advisable to always check that you have filled out everything correctly. Remember that once you place an order, it can be executed immediately and you will not be able to cancel it.
