Probably, the best way to buy or sell bitcoins or other cryptos is to use an exchange. There, you can select between placing a market or limit order. This article answers the common question “What are market and limit orders?” with a focus on cryptocurrency trading. You will know how these two types are different and what risks and benefits each of them involves.
Order types: Overview
There is a great variety of orders you can execute while trading. Some examples are: FOK (Fill or Kill), IOC (Immediate or Cancel), SL-M (Stop Loss market Order), SL-L (Stop Loss Limit Order), OCO (One Cancels the Other), etc.
All of them belong to one of the two main order types: Market order and Limit order. Let’s see what they are and how they work.
What Is Market Order
Simply explained, a market order is a method to sell or buy a certain asset almost instantly, at the best market price available. We can (very roughly) compare it to booking a flight online. On the website of your favorite flight aggregator, you enter your optimal flight parameters. In a few seconds, the system returns the flights that meet your needs, highlighting the best option in terms of price. If you need to book a seat right now, you pay the price the aggregator sets. Within a minute, you receive your e-ticket.
How a Market Order Works
A market order works in a similar way. You agree to sell your bitcoins (or whatever you deal with) for the price other market participants are ready to pay you right now. Depending on the current market mood, this price can be good or bad, but you accept it. Continuing our air travel analogy, you buy your ticket now because you need to fly tomorrow.
Placing a Market Order: Real-Life Examples
You have a reason to believe that the price of XYZ coin will rise significantly very soon. Therefore, you want to buy 100 XYZ until the demand for it grows. There’s no time to lose, so you opt for a market order.
On the exchange dashboard, select the market (trading pair) you need. In our example, your goal is to buy 100 XYZ for USD. In the list of available trading pairs, select XYZ/USD. On the Market Order tab, enter the amount of XYZ you want to buy.
In your case, time is the first priority. So, the platform will automatically match your market buy order with the best limit sell order in the order book. Say, someone wants to sell 100 XZY for 500 USD. It’s “the cheapest flight” right now.
Now, imagine that you want to buy 500 XYZ. For this order, the price may be different. In our example, the best sell order (100 XZY for 500 USD) is too small to fill your buy order. Therefore, the system will have to match you with the following sell orders in the book. As a result, you may pay more than expected (5 USD for 1 XYZ). It’s called slippage.
Slippage: What It Means and When It Occurs
This term refers to the difference between the price you expect and the price you actually pay. In the example above, your buy order was too big. There were not enough coins available at the best price, and the system had to distribute the desired amount (500 XYZ) across several different orders. As a result, the total price of your order rose. It often happens if the assets you trade have low liquidity.
Also, slippage may be the result of high volatility. As you know, crypto assets are still very volatile, so the price of any coin (including BTC) can change between the moment you place your order and the moment you execute the deal. It can happen because of some news or an expert’s prediction. But mostly, there is no apparent reason.
To reduce the effect of slippage, we recommend you avoid trading during unstable times or place limit orders instead of market ones.
What Is Limit Order
This type of order allows you to set the price yourself. If you are lucky, you may end up with a better price than the one you asked for. In a way, it’s like subscribing to the CheapFlights newsletter. You set your price limit and other parameters and wait until a suitable ticket comes up.
Sometimes you can buy a flight at the price you want (or even cheaper). On the other hand, there’s no guarantee. You risk staying at home if there are no special offers from air carriers.
How a Limit Order Works
Imagine that you are ready to buy/sell your XYZs at a certain price only. It makes sense to opt for a limit order. Under this scenario, be prepared to wait for a while until the price of the asset reaches the limit you set. Meanwhile, you can do whatever you like.
It looks like a smart option but there are some pitfalls, too. No one can promise you the deal will ever happen, because a limit order activates only when the fixed price is reached.
Placing a Limit Order: Real-Life Examples
You are going to sell your 100 XYZ because you need 500 USD. So, you place a limit order on an exchange where this coin is available, with the selling price of 5 USD (500 USD for 100 XYZ). It means that unless someone wants to buy your coins at this price, they will stay in your wallet.
Another example: you want to buy a new token (ABC) as it looks very promising and you trust the team behind it. However, you are unwilling to pay too much, as its price has been roller-coasting for the last few weeks. You place a buy order, setting a reasonable price (1 USD for 1 ABC) and the amount you want to buy (100 ABC). As soon as the price drops down to 1 USD, your order executes.
Limit Order vs Market Order: Basic Differences
Each type of order serves its purpose. To make the right choice, consider the situation.
Market orders are perfect if you wish to sell or buy your assets immediately. Of course, you would love to get a good price, but it’s your second priority. In other words, a market order is suitable for an emergency or when you are short of time.
Limit orders mean you are ready to wait for the acceptable price to come up. It guarantees you won’t sell or buy at a worse price than what you are happy with. The biggest disadvantage is obvious, too. You never know if the price of the asset will ever reach the desired mark.
Some Useful Tips For Beginners
Here are some things to keep in mind when placing orders.
- Avoid market orders if your asset has been very volatile lately. Otherwise, you may pay way more than expected.
- Market orders are perfect for buying an asset with a high liquidity level.
- When short of time, opt for a market order. If you are not in a rush, consider a limit order.
- Market orders are also handy when you expect a big event that is likely to affect the price of your asset positively or negatively. Therefore, you have to buy (sell) this asset asap until its price skyrockets (plummets).
- Before clicking Buy or Sell, double-check the numbers. For instance, if you shift the decimal to the right or left by accident, it will ruin the deal. Those not very good at math should use an online currency converter to copy-paste the correct numbers right into the order tab.
- Note that your limit order may not execute even if the price reaches the mark you set. It happens when there are other orders for the same price, preceding yours. They will come first, and you will have to wait your turn. Probably, this turn will never come.
- Most exchanges allow you to edit your limit orders to re-adjust the price to the changing market. You can also cancel them rather easily. But if the order is already in progress (i.e. it’s filling), canceling might be a problem.
- Market orders are almost impossible to cancel as they fill very fast.
- Market orders normally mean higher fees than limit orders.
We hope, this article managed to answer the question “What are market and limit orders?” and made the pros and cons of both types clear.
Originally published at Exscudo Blog. Check it out for more articles on crypto, blockchain, finance, trading, and technology.
