Trading Toolkits: Order Types Explained

The first step to trading efficiency is the education on how to trade, and it starts by understanding order types.

By
Wilfred Victor
on
February 21, 2021
Category:
Trading Toolkits

Introduction

Whether as a newbie or advanced trader, you’re probably familiar with the different order types available in various crypto exchanges.   These order types allow users to trade across varying markets and multiple tools.  It is necessary that traders are familiar with the different order types available in the market and to execute the most efficient market transactions. In this guide, the order types are explained.


Makers Vs. Takers

Before exploring the different order types available in the market, understanding Makers’ and Takers’ role is vital information needed by market participants. Makers and Traders are both traders executing orders through an exchange. They are respectively the liquidity providers and the liquidity takers needed for an exchange to thrive. Trade execution occurs when buy orders meet sell orders.

Makers make the trade; they set up-sell or buy orders entered into the order book and bring liquidity to the exchange. For example, a trader is willing to sell his 10 BTC at the value of $55,000; he sets up an open order for willing Takers to take on the trade. Maker orders are typically not executed immediately; their orders make up part of the order book where trade inventories are entered.


Takers, on the other hand, take off liquidity from the exchange. They execute market buy or sell orders by taking on Makers open trades. If you’ve purchased or sold at market price, then you’ve functioned as a taker of already available orders. Typically takers will utilize limit order to provide depth to a specific market. 

Makers have the most rewards because they bring in the liquidity needed for an exchange to thrive. Although big trading firms often act as market makers or liquidity providers for an exchange, smaller or individual traders also take on that role. Despite the reward, one is not without the other as both traders would need the various order types to execute their trades.


Limit Orders

Trader A believes an asset will increase in value in the nearest future and does not want to execute his trades at the current market level. He ideally sets a sell order at a price in the future. Trade B believes the price of an asset is way too much at the current market price, expecting a correction, he immediately sets up a buy order at a price he believes the asset will drop to in the future. Both Trader A and B explored the Limit Buy and Sell Order, which allows traders to set up an expected entry or exit that is not currently present in the market. Both trades are set up against the future price increase or correction of the asset. Traders who use these trade orders are called Makers.


Market Order

This order type is instantaneous. Traders who do not want to take on too much time for their orders to be filled make use of the market order type. For instance, Trader A believes the worth of an asset is dirt cheap at the current market price (CMP), and price discovery is on its way, which will blow up the price of the asset. Trader B holding an asset and believes a crash is inevitable; using a market order the trader could immediately exit his position using the tool. Both traders are known as Takers.

Limit and Market Order are the two most common Order types in most exchanges. However, as the market continues to grow more Order type gets introduced.


Stop-loss Order

For most traders, this order type is a necessry aspect of their daily trading experience. As the name specifies, a stop-loss order closes a losing trade when the price is triggered. The stop-loss order is set below the current price level and is not entered into the order book. Trades get stopped out when a percentage price loss is triggered automatically using Market Order.


Stop-Limit Order

Stop-limit is a modified aspect of the stop-loss order using the limit function. Traders get the option of setting a stop and a limit price, i.e., when your trade set up hits your stop limit, the market immediately sets up a sell limit that takes you off the trade. For instance, your stop price is around $50,000, and the limit price at $51,000. When the price reaches your stop entry at $50,000, a limit order is set up for you at $51,000 to close the trade. The risk associated with this order type is that the price limit might not be realized again due to the high price impact. Therefore, it is advised to set your Stop-limit orders close to each other to take care of market volatility.


One-cancels-the-order (OCO)

OCO combines the best of both worlds of selling at a target price and setting stop-limit at a given price range. With OCO, traders ensure profit-taking at any point of their preferred targets and protection when the trade takes a different turn. Either win or loss, when one order type is executed, the other order is canceled. For instance, a trader sets his exit at $55,000, his Stop-limit order at $50,000 and $51,000, respectively, when the trade gets to $55,000, it automatically close the orders at $50,000 and $51,000.


Good Till Cancel (GTC) 

GTC is an instruction for a trade to stay open until it is canceled or executed. This is the present state for the cryptocurrency market since it’s a 24/7 market versus the stock market’s daily close and the forex market’s weekly close.


Take Profit Limit Order

Trades set up these limit orders to sell or buy when the price reaches a profit target. When triggered, the order executes the trade in profit. This resembles the OCO order type; the difference is that it offers no stop-limit protection but only profit-taking abilities. 


Trigger Entry

Allows you to enter a position using a trigger mode. For trigger entry order price, the trigger price represents the price that, if reached, will trigger your order and submit a market order. For trigger entry, you have to provide a trigger price and a limit order.


Fill or Kill

Say a trader is looking at buying 10 BTC worth around $40,000. A fill or kill order either fills the entire 10 BTC order at that price, not partial, or it doesn’t execute at all if the price makes a rebound.


Immediate or cancel (IOC)

IOC is the milder approach to the Fill or Kill order type. With Immediate or Cancel orders, the order can be partially filled. For example, if an order to purchase the earlier 10 BTC is not filled, the amount of BTC that can be loaded is taken, the rest is canceled. Say only 5 BTC is filled, the remaining order is closed to stop any further buying or selling.


In closing

The first step to trading efficiency is the education on how to trade, and it starts by understanding order types. It comes with a high recommendation that an intending trader first learns the market types and the order types before taking on trades. Learning early before earning has been the mantra for ages, and trade is an industry that quickly exposes individuals without the skills, knowledge, or expertise. Before taking your first trade, ensure you understand the concepts as losses are common with trading ventures. But, with the right knowledge and education, losses are reduced significantly, and profit becomes a consistent experience.










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Wilfred Victor

Ace finds himself as a blockchain enthusiast who is focused on growing with the entire crypto sector. He is an energetic and passionate writer who believes that all things are achievable.