With the evolution of technology, a plethora of exchanges and assets are launching in the market. Trading volumes have grown by leaps and bounds in all parts of the world. The popularity and technology associated with cryptocurrency has attracted many traders who want to be a part of the Blockchain revolution. However, placing orders is not as intuitive as clicking on “buy” to initiate a trade and “sell” to close one. In fast moving and highly volatile markets, it is important for traders to understand the difference between the various types of orders to prevent market slippage from turning against their fortunes.
Newcomers in the Blockchain field often get stuck when it comes to placing orders for cryptocurrencies on the crypto exchanges because of the different order types that are available to them.
Simply put, order types are instructions that you send to your broker about how to execute your trade. Some of the common order types are market order, limit order and stop orders. Each order type has its own advantage and disadvantage. This article has been written to explain the common order types and how they affect your trade.
Trading on CoinDCX
The CoinDCX platform offers 3 different order types while using DCXtrade and DCXmargin with the only difference that the order types can be placed with leverage when trading with DCXmargin. There are two additions to margin trading. These include Bracket order and Trailing Stop Loss.
Let us discuss the three order types that will help users while placing orders.
Oftentimes traders are more concerned about the speed of the trade rather than the price at which the cryptocurrencies are purchased. It is during that time they prefer using market order. This order type indicates that you want your order to be filled immediately at the next available price. Whatever happens, happens now. That is why market orders generally execute at or near the current bid (for a sell order) or ask (for a buy order) price if prices are too volatile.
The lack of restriction on price means that this order type has the best chance of getting filled but it also has the risk of being filled at a different price. This can particularly get risky for cryptocurrencies which are highly volatile or whose prices vary too much when news related to them is spread in the market.
For example, you might try to sell the Bitcoins in your portfolio if you have anticipated a price fall. You put a market order to sell at $9,210.31 to get maximum profits from your trade. But market orders do not get executed immediately. The volatility of the markets and the time it takes for the execution of your trade might wash out all the potential gains you were trying to make. You might enter a trade at $9,210.31 but it might get executed at $9,175.39. This drop in price happened within minutes and you could do nothing!
If your priority is to buy or sell at a specific price or better, you may want to use a limit order instead. Setting up limit orders allows traders to specify a price for the trade to get executed. Trades do not get executed till that price or a better price has been reached. However, because of the price restrictions, there is no guarantee that the order will be placed quickly or be placed at all. Investors generally use limit orders when they have a target entry or exit price and are willing to wait for the market to move in their favour.
For example, let BTC be trading at $9020, and you believe it would be worth a buy at price $8900 or less. This investor could place a limit order to buy at $8900. If the limit order price is never reached then the order is never filled. If the price reaches the limit price or falls below it then, given enough volume at that price the order will fill and the investor will buy it for $8900 or less. The price is still moving while the order is filled when the limit price is reached. This might lead to trades not being filled completely or only partially filled. There might be several different points where the trade is executed.
Stop order is nothing but a market or limit order with an activation price that triggers the order. Once the stop price is hit, the order then becomes a market or limit order. Investors can use buy stop orders to buy cryptocurrencies when they reach their activation price or they can use sell stop orders when trying to limit potential loss in an investment.
While there are different types of stop orders such as stop market (Works similar to a market order. Only difference is that market order is activated once the stop price is hit), stop limit and trailing stop, this article covers the stop limit which is also an order type on the trading platform of CoinDCX.
Stop Limit Order
It might happen that an investor is still unsure of the direction in which the price of a cryptocurrency will move. For example, let Bitcoin be trading at $9,000 at the moment. The investor believes that the price of bitcoin will start rising and the market will be bullish once the price hits $9,050. The investor believes that the price could go as high as $9,500 in a few days once it crosses $9,050 (the stop price). He could also set a price (a limit order price) which could be $9,050 or lower. For a lower price (let it be $9,040) that is chosen, this means that when the Bitcoin price crosses $9,050 the limit order gets activated and once the price of Bitcoin falls to $9,040 or lower, the order gets executed.
This is how easy it is for traders to use the CoinDCX trading platform. This order type is useful for those traders who are not sure about the current market scenario and only want to enter once there is enough evidence of the market going in their favour. Another benefit is that you can still decide what price you want to enter and exit a trade at. One disadvantage is that your order might not get executed at all.
A bracket order is another type of order that is available to margin traders on CoinDCX’s platform. It is an order type where traders can enter a new position along with a target/exit price and a stop-loss order. This helps traders lock in their profits and minimise their loss at the same time. The price either reaches the target price, thus generating expected profits or gets sold at the stop loss price, minimising the loss. The execution of the main order results in two more orders getting placed. These are the profit taking and the stop loss order. The execution of one of these orders results in the automatic cancellation of the other order.
Checking the Bracket order feature on DCXmargin allows traders to set a target price. It is the price at which the trader plans to buy/sell or close the order position. When the target price is hit, the trade is closed and the trader’s funds are settled according to the P&L incurred. The SL price is the price at which the trader wants to stop loss.
Trailing Stop Loss Order
Setting a trailing stop loss helps in setting the maximum loss that the traders are willing to bear. The specific SL Price informs the exchange about the loss that traders can risk losing. The trailing stop loss feature has an advantage that the stop loss moves in the direction of the movement of the price if it is favourable for the traders.
For example, you have purchased a crypto for $200 and can only bear a $20 loss at maximum. If the price falls to $180, the order is executed and you get $180 back. In case the price starts rising from $200 to $250, your stop loss starts trailing the price to $250 and your stop loss order now gets triggered when the price drops to $230.
There are many other order types which are usually not used in our day to day life or while trading in crypto. For those who are excited to learn more can view this article from Investopedia.