People that deal with cryptocurrency buy, sell and trade it using different order types. Primarily, there are market orders, limit orders and stop orders, and each have their own pros and cons. Anyone that wants to better understand cryptocurrency should take a closer look at them and see which one best suits their needs. While market orders allow a trader to buy or sell a cryptocurrency at the current market price of the exchange at the time the order is placed, limit and stop orders set specifications for a trade to be executed at a future time, when certain conditions are met. This article will look at the differences between limit and stop orders.
The reason there are different types of orders is so that traders can be more specific about how the buy and sell. It’s a way for traders to execute trades when the market prices hit certain levels. With limit orders and stop orders, traders try to control their transactions. That’s because cryptocurrency is very volatile. Unlike traditional currency, cryptocurrency isn’t centrally controlled, so it’s not unusual to see both spikes and crashes in the market.
Trading Cryptocurrency 101
For those who want to start trading cryptocurrency, they first need to obtain a cryptocurrency wallet. A cryptocurrency wallet is a digital wallet. Owners use the cryptocurrency wallet to store all public and private keys that receive, send and hold digital currency.
The other thing that participants need is an exchange to trade cryptocurrency on. An exchange is simply an online platform where traders exchange different types of cryptocurrency, as well as traditional or fiat money. They are much like stock exchanges where people trade depending on their current market price. With several different kinds of exchanges out there, participants must select the ones that best suit their needs. Traders have limits as to how much they can sell and buy.
When it comes to trading cryptocurrencies, traders need to know about limit orders vs. stop orders to keep control of their investments.
All About Limit Orders
A limit order is a predefined order to buy or sell coins at specified prices, but the order does not execute until specifications are reached.
Generally, cryptocurrency traders want to buy below the current market price or sell at a price above the current market price. They can do that by setting up limit orders that let them buy or sell at a price they specify.
In other words, a limit order can help a trader who is looking to buy find lower prices so that when an option comes along at a price that is lower than the market price, it prompts a purchase. If a trader is looking to sell at the highest price possible, they can set a limit order above the current market price.
For example, a trader might note that the market price is $100. They would set their limit orders to buy if the price fell below $93 or lower. They might set the sell limit order to $105 or higher. When the market price reaches either of these limits, it triggers transactions which are filled at the best possible price.
Traders will set up these two different prices in advance of any transactions. Working with the current price, the limit order can be a good way to meet or exceed the price that the trader wanted. When the set price is reached, the limit order is triggered, and transactions then take place.
All About Stop Orders
A stop order is a predefined order to sell (or buy) coins in a transaction when a set market price is met.
Due to the volatility in the cryptocurrency market, there are many instances where the market price is trending downward at an alarming rate. Stop orders are designed to limit the losses in the event this happens.
With a stop order, often referred to as a “stop loss order”, the cryptocurrency trader sets a predefined price to sell, or sometimes to buy. A cryptocurrency trader will typically set a price that will trigger an automatic execution of their orders. Once the market price hits that stop order price, it is implemented. A transaction triggers when a price is reached that point where the trader is unwilling to go.
For example, if the market price is $100, a trader can set a stop order to better manage their desirable target range. If the price falls below their stop order of $90, it would trigger a sell. The transaction only occurs if the market price drops below the stop order price.
Stop orders provides a trader’s investment in cryptocurrency with some safety in the event there is a large downward swing where it can help limit losses. While stop orders are usually implemented as more of a selling tool, they can also be an effective buying tool as well.
Limit Orders vs Stop Orders
Which order should people use—a limit order or stop order? It depends on what is happening with the current situation and the participant’s ultimate goals.
Traders need to figure out if they are looking to buy or to sell. Then, they must analyze what price they are willing to pay for a buy order or accept for a sell order. After answering these questions, they’ll be better able to assess whether a limit order or stop order will help them the most.
Most traders combine the two types of orders for maximum advantage. Using these specialty tools, they can use the right order to help the meet their goals. It makes sense that traders want to choose the price they want to buy and sell. Limit orders and stop orders are ways that allow traders of all levels to try their best to get the most advantageous transactions in the world of cryptocurrency.