Order Types Explained: Limit Orders and Market Orders, a Traders Perspective

I see many people being drawn into the crypto spheres looking to trade cryptocurrency assets on a daily basis. The very first thing you will probably encounter is the type of order you wish to select. When I began my trading career I could not tell the difference, and the information that was available explained the factual and often technical meaning of the order types. However, I struggled greatly with what it really meant in practice. In this article I will cover two of the most basic order types and how they can be used in practice.

Ordering around:

Amongst the many different order types, the most common are the Limit Order, and the Market Order. To fully grasp their concepts, let’s start with clearing up what an order actually means. An order is in essence a request to buy or sell a specified amount of contracts. The way the order is being executed is where the difference lies between different order types.

Limit Order:

Imagine that after a long drive in your car, you decide to stop for a bit at a diner on the way and next to the road, get a bite to eat and refresh yourself in the restroom. There is only one restroom. You walk to the restroom and you find out that it is currently in use by somebody else. There are other people that have the same idea and find themselves in the same situation as you, and as a result, a line starts to form. The person who joined the line last needs to wait longer in order to use the restroom.

This analogy is very similar to the way a limit order works. When a limit order is placed, the specified amount of contracts are placed in the order book at a specified price level. This means that when the price hits the level and there are other limit orders waiting, your position is getting filled and you are now exposed to the market as you desire.

With a limit order, you are ensured that you buy or sell the asset at exactly the price you specified in the orderbook. On the other hand, if the line is too big, it might happen that your order will not be filled and you might be forced to participate at a different price level.

Market Order:

Let’s return back at the same analogy we used to explain the limit order. Imagine the same situation at the diner, but now there is a little sign written on the wall. The sign explains that you are able to move up to the front of the line enabling you to use the toilet right away in exchange for a small fee.

Once again this analogy explains the workings of the market order type perfectly. With a market order you are essentially able to cut the line at the cost of a fee. Whenever you select the market order type option and decide to buy or to sell a specified amount of contracts, the order will execute right away and jumps to the front of the line grabbing whatever is available in the order book. In exchange for a fee you are able to jump the line and get involved in the market right away. You will never have to wait. However, if the orderbook is thin and there is not enough orders available at the current price, the market order takes orders from different price levels. This can lead to your order being filled at a different price than it currently was.

Which one do I use?

The answer is simple yet complex. Each order type has pros and cons. With a limit order you are ensured to buy or sell at the price of your desire but run the risk of not getting filled if there are too many people waiting in line. On the other hand a market order lets you get involved right away, but your price of entry can be unreliable. So in essence, one order type is not better than the other. Depending on the type of trader you are, and the volatility present in the markets both order types can be greatly beneficial. Understanding its underlying concepts can aid you greatly in making an informed decision on which to use.

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The information provided above is not financial advice but for educational and entertainment purposes. Please do your own due diligence or consult a financial advisor before investing in any digital assets.

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