Here we will cover the basics of placing orders on the exchange as well different
kinds of trading and how to analyze chart patterns.
PLACING ORDERS ON THE EXCHANGE
To open and close positions on the exchange, exchange orders are used.
Depending on the type of execution, there are market orders and pending orders.
Pending orders, in turn, can be limit orders, stop orders, or stop limit orders.
Each type of order can be used to buy or sell some kind of asset.
I recommend using only limit orders, but we will discuss this point in detail a bit
Let’s consider an example of an order on the Kraken exchange. An order may
look different on different stock exchanges, but its essence remains the same.
The easiest way to buy or sell something on the stock exchange is to place a
market order. This order is executed at the current market price immediately
after placing it on the exchange if there is a reverse limit order for it. For
example, to execute a market buy order, a sell limit order is required. To execute
a market sell order, a buy limit order is required.
To execute a market order, the best one is chosen from all the available limit
orders. Therefore, the market buy order is executed at the ask price, while
market sell order is filled at the bid price.
When dealing with this kind of order, you do not need to specify the price, just
the volume, i.e. how much you want to buy. However, there is a big problem you
can face – slippage. What is it? It is the difference between the expected price of
a trade and the price at which the trade is actually executed. Slippage may occur
during periods of higher volatility when market orders are used and also when
there are large orders there may not be enough interest at the desired price
level to maintain the expected price of trade. It is for this reason that I do not
recommend using market orders at all.
Before proceeding to other types of orders, let’s look at the terminology
mentioned above: bid, ask, andsSpread. A bid is the price a buyer of the
cryptocurrency is willing to pay. Ask is the price a seller is willing to accept.
Spread is the difference between these two prices.
In market relations, the buyers set the price they want to get an asset for while
the sellers set the price they want to sell an asset for. Put simply, it is bargaining:
a buyer sets a lower price, and a seller insists on a higher price. It is the situation
observed on the cryptocurrency exchange.
So the orders of buyers with the specified prices stand in a kind of line. To be the
first in this line, you must offer the best price. At the same time, sellers with the
ask price also line up. The first in this line is also the one who offers the best
price. Each price has an indication of the volume a buyer wants to buy or a seller
wants to sell. Traders call such lines of pending orders on both the bid and ask
side market depth.
Here’s an example. Let’s say you place a market order to buy coins for $5,000,
but the value of available coins is just $1,000.
The price you pay for the coins at the time your order is executed will be in
between these prices. I should also mention that the exchange is also artful and is
always happy to earn something. If you place a market order, then be 99% sure
you will never get the very first ask price. As a result, you’ve sent your order,
and then, for example, get a price of 244.78.
By the way, in this situation, you can use the easiest way to make a profit on the
exchange without taking a risk – make the spread, i.e. the difference between the
bid and ask prices, wider.
I recommend using a limit order to avoid similar situations. A limit order is an
order to buy or sell a certain volume of an asset at a specific price. Here we
consider two parameters: price and volume. For example, you place an order to
buy coins for $5,000 at a price of $243.47. The first option: you can place a buy
limit order, for example, in the bid line. So you join the line of buyers waiting
until their orders are filled. Another option: you can come to the sellers and
make a deal at their price, but one which is not lower than yours.
However, it may happen there is no sufficient volume to fill your order. What
should you do to get the needed volume? You should evaluate your order with
regard to the overall liquidity of market depth. That is, you need to examine
what orders have been placed. Theoretically, you have a chance to gather the
first best positions regarding price and volume, but there is always a possibility
that someone had already placed an order before you and took this volume
because the information is sometimes displayed with a delay. If you still want to
fill your order (not using a market order to avoid large slippage), you simply
place a limit order at a price where your order will be definitely executed, not at
a price you wish it were executed. This means that you are very likely to fill
your order at a price offered by a seller. If these orders are in the market and
you’ve managed to hit them, then you increase your chances of filling your order
having offered a little bit outsized price.
Now let’s touch on the topic of stop orders. A stop order is an order to buy or
sell a stock when its price surpasses a particular point.
Let’s say you set your exit price at $200. Thus, once the price reaches $200, your
stop order turns into a regular market order. However, I do not advise you to use
this type of order.
There is also a stop-limit order that combines the features of a stop order with
those of a limit order. A stop-limit order requires the setting of two price points.
The first point initiates the start of the specified action, referred to as the stop,
while the second represents the outside of the investor’s target price, referred to
as the limit.
In my opinion, a stop-limit order is even worse than a stop order. It does not
guarantee the order execution, even if a price reaches a given stop price (because
the limiter might not work). For this reason, I do not recommend using stop-limit
orders to close position with a view to limit losses (stop-loss). In addition, not all
brokers accept this type of trade order.
In other words, it seems that stop orders should protect you from losses because
if something suddenly starts to fall, you can close the position. In fact, it doesn’t
work that way, and stop orders will be of no use. You might think that you place
a stop order, it will definitely turn into a market order when the price reaches a
specific level and your position will close. However, when you use a stop-limit
order, it is logical that your stop turns into a limit. If there is a price in the market
to execute your limit order, it will be executed. However, if the market does not
offer such a price, you will simply stand in line and wait. Thus, I believe it does
not make sense to use a stop-limit order.
There are such orders as GTC and Fill or Kill. A GTC (Good Till Canceled)
order remains active until it is either rescinded by the investor or the trade is
executed. In this regard, such an order is very convenient. Fill or Kill order is a
limit order variation. If in the previous situations you placed a limit order, you
may get only part of your desired volume, but with a Fill or Kill order, your
order must be filled in its entirety or cancelled.