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Exchange Order Types Explained

order types 500x286 1 - Exchange Order Types

Think of trading as the exchange of assets between a buyer and a seller. Then we can call a trade order an instruction to exchange an asset like Bitcoin for another asset at a specific price or price range. Furthermore, all trade orders are either buy or sell orders since all traders are buyers and sellers. Now, we will analyse the three most popular order types and how they work in order to a foundation when trading cryptocurrency. 

What Is a Limit Order?

A limit order is an order that you place on the order book with a specific limit price. The limit price is determined by you. So when you place a limit order, the trade will only be executed if the market price reaches your limit price (or better). Therefore, you may use limit orders to buy at a lower price or to sell at a higher price than the current market price.

Unlike market orders, where trades are executed instantly at the current market price, limit orders are placed on the order book and are not executed immediately, meaning that you save on fees as a market maker.

How to use it?

Let’s say you want to sell BNB at a higher price than what is currently being bid. After logging in to your Binance account, choose the BNB market you want (e.g., BNB/BTC) and go to the trading page. Then, find the Limit order tab, set the price and amount, and click the Sell BNB button. You may also set the amount by clicking the percentage buttons, so you can easily place a limit sell order for 25%, 50%, 75% or 100% of your balance.

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After that, you will see a confirmation message on the screen, and your limit order will be placed on the order book, with a small yellow arrow.

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You can scroll down to see and manage your open orders. The limit order will only execute if the market price reaches your limit price. If the market price doesn’t reach the price you set, the limit order will remain open.

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When should you use it?

You should use limit orders when you are not in a rush to buy or sell. Unlike market orders, the limit orders are not executed instantly, so you need to wait until your ask/bid price is reached. Limit orders allow you to get better selling and buying prices and they are usually placed on major support and resistance levels. You may also split your buy/sell order into many smaller limit orders, so you get a cost average effect.
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What Is a Market Order?

A market order is an order to quickly buy or sell at the best available current price. It needs liquidity to be filled, meaning that it is executed based on the limit orders that were previously placed on the order book. 
Unlike limit orders, where orders are placed on the order book, market orders are executed instantly at the current market price, meaning that you pay the fees as a market taker.

How to use it?

Let’s say you want to create a market order to buy 2 BNBs. After logging in to your Binance account, choose the BNB market you want (e.g., BNB/USDT) and go to the trading page. Then, find the Market order tab, set the amount to 2 BNB, and click the Buy BNBbutton.
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After that, you will see a confirmation message on the screen, and your market order will be executed.

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Since market orders are executed right away, your market buy order will match the cheapest limit sell order available on the order book, in this example 2 BNB for 5.2052 USDT each.

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But let’s say you want to buy 500 BNB at the current market price. The cheapest limit sell order available will not be sufficient to fill your entire market buy order, so your order will automatically match the following limit sell orders, working its way up the order book until it is completed. This is called slippage and is the reason why you pay higher prices and higher fees (because you are acting as a market taker).

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When should you use it?

Market orders are handy in situations where getting your order filled is more important than getting a certain price. This means that you should only use market orders if you are willing to pay higher prices and fees caused by the slippage. In other words, market orders should only be used if you are in a rush.
Sometimes you might be in a situation where you had a stop-limit order that was passed over, and you need to buy/sell as soon as possible. So if you need to get into a trade right away or get yourself out of trouble, that’s when market orders come in handy.
However, if you’re just coming into crypto for the first time and you are using Bitcoin to buy some altcoins, avoid using market orders because you will be paying way more than you should. In this case, you should use limit orders.

What is a Stop-Limit Order?

The best way to understand a stop-limit order is to break it down into stop price and limit price. The stop price is simply the price that triggers a limit order, and the limit price is the specific price of the limit order that was triggered. This means that once your stop price has been reached, your limit order will be immediately placed on the order book.

Although the stop and limit prices can be the same, this is not a requirement. In fact, it would be safer for you to set the stop price (trigger price) a bit higher than the limit price (for sell orders) or a bit lower than the limit price (for buy orders). This increases the chances of your limit order getting filled after the stop-limit is triggered.

How to use it?

Let’s say you just bought 5 BNB at 0.0012761 BTC because you believe the price is close to a major support level and will likely go up from here. 
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In this situation, you may want to set a stop-limit sell order to alleviate your losses in case your assumption is wrong, and the price starts to drop. To do that, log in to your Binance account and go to the BNB/BTC market. Then click on the Stop-Limit tab and set the stop and limit price, along with the amount of BNB to be sold.

So if you believe that 0.0012700 BTC is a reliable support level, you may set a stop-limit order just below this price (in case it doesn’t hold). In this example, we will set a stop-limit order for 5 BNB with the stop price at 0.0012490 BTC and the limit price at 0.0012440 BTC.

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When you click Sell BNB, a confirmation window will appear. Make sure everything is correct and press Place Order to confirm.

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After placing your stop-limit order, you will see a confirmation message.

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You can scroll down to see and manage your open orders.

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Note that the stop-limit order will only be placed if and when the stop price is reached, and the limit order will only be filled if the market price reaches your limit price. If your limit-order is triggered (by the stop price), but the market price doesn’t reach the price you set, the limit order will remain open. This means that the stop-limit order will become a limit order to buy or sell at the limit price (or better).

Sometimes you might be in a situation where the price drops too fast, and your stop-limit order is passed over without being filled. In this case, you may appeal to market orders to quickly get out of the trade.

When should you use it?

Stop-limit orders are valuable as a risk management tool, and you should use it to avoid significant losses. Noteworthy, they are also useful for placing Sell orders to ensure that you take your profits when your trading targets are reached. You may also set a stop-limit buy order to buy an asset after a certain resistance level is breached during the start of an uptrend.

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