Order types
Basic Information
When trading cryptocurrencies on an exchange platform, besides the normal “market order” (placing an order to buy or sell at the current price), there are many other types of buying / selling orders that can be programmed to be instantly placed when certain market conditions are fulfilled.
These programmed orders allow trading without having to spend too much time checking market fluctuations and can be divided as follows.
Order types
Basic
- Stop sell order: sell if the price falls to X or less
- Limit sell order: sell if the price increases to X or more
Take Profit (TP)
A type of limit sell order, but instead of placing the order to sell when X price is reached, it places the order when a certain profit is reached. In other words, it takes into account the maximum difference between the previous price of the asset (when it was bought), and the current price
- Stop buy order: buy if the price increases to X or more
- Limit buy order: buy if the price falls to X or less
- All or None (AON): a restriction that forces the order to be fulfilled only if it can be executed all at once, not only partially. For example, it is possible to make a buy order of 20 units, but only 10 are available for sale. Without the AON restriction, the 10 units will be bought, and the order will then stay in place until there are another 10 units for sale. With the AON restriction, the order will not be fulfilled until there are 20 units for sale at once
- Immediate or Cancel (IOC): a restriction that forces the order to be executed within a very small time-frame, usually seconds. After the time lapses, it gets canceled
- Good till Canceled (GTC): this is a time restriction that can be applied to any other order type. For example, it is possible to place a limit sell order, but have it expire after 30 days
PROs
- Allows trading without spending much time watching market fluctuations
- Protects investments against price crashes
- Helps investors not to miss opportunities to buy underpriced assets
CONs
- An order can be forgotten after some time and execute some unwanted trading
Conclusion
In conclusion, it is important to understand all the different automatic order types in a market besides “normal” market orders, because the automatization of trading has become practically mandatory for those who want to fully dedicate their money and time to investing in cryptocurrencies and other assets.
When using these types of orders, investors don't need to check market fluctuations all the time, in order to buy and sell.
These types of orders are used not only for speculation, but also for risk reduction. I wouldn't recommend using them for consolidated cryptocurrencies, because the risk is way lower than in new projects, and the purpose of these currencies is to be used as a store of value and payment method, not as a means of speculation. Nevertheless, these orders are very useful when investing in new cryptocurrencies and DeFi projects, with very high risk.
Analyst opinion
Trailing stop selling orders, particularly those using percentages, are one of the best investments strategies, for the following reasons:
- They not only protect from holding an asset that falls under a fixed price, but also protect over any abrupt fall that could create a continuous downtrend of the asset's price
Example: A regular stop sell order could make sense only after a while, but it might be necessary to manually adjust it at some point. For example, fixing a stop sell order of 500 USD of bitcoin could have made sense many years ago, but it would be outdated at the moment. On the contrary, placing a trailing stop sell order of a percentage of the price will continue to make sense over time, because it will avoid holding bitcoin after a rapid drop in price that could mean the beginning of an even worse downtrend. Even if the price is still above 500 USD, a rapid fall from 20,000 USD to 15,000 USD could be a bad sign, and it could then be desirable to sell the bitcoin even if the price is still above the 500 USD that was previously fixed.
- As a consequence of the previous point, trailing stop orders can be considered better for long-term strategies
- They require less attention and time than normal stop sell orders
Stop-limit sell orders are also a very good strategy, because sometimes, investors might panic if an asset falls too much, and decide to sell. But this sale might only make sense to them if the fall isn’t too great or too quick, because in that case, there would not be much motivation to sell as the return would be so low. In cases like this, it might be more desirable to wait for a rebound in price, instead of “panic selling.”
On the other hand, regular limit orders and stop orders can be beneficial for more specific types of investment. It can be said that limit sell and limit buy orders are better for speculators and high-risk investors, because they are motivated by profit expectations.
On the contrary, stop sell orders are better for conservative, low-risk investors. These orders are motivated by precaution or fear, because they work as a protection mechanism against losing accumulated capital.
Stop buy orders, on the other hand, can be a good fit for traders that suffer from FOMO, because they work as a way of avoiding missing a bull run.
VWAP (Volume-Weighted Average Price) segmented orders have become probably one of the most popular ways of trading in every market. Some investors use this strategy to try and predict when a price trend might reverse, or to predict a bull run or bear market trend. They tend to sell when the price goes below the VWAP line, and buy when the price goes above it.
AON orders are very useful for small markets (for example, when trading with very new cryptocurrencies or DeFi projects), because these markets tend to have low liquidity, more waiting time between orders, and a higher risk of slippage.
Analyst
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