Understanding Market, Limit, and Stop Orders For Cryptocurrencies like Bitcoin on Exchanges Like GDAX

The three basic types of trades you’ll do with cryptocurrency are market, limit, and stop orders. We explain each using simple terms.[1][2]

The concept of order books on an exchange: An exchange (like GDAX or Kraken) allows you to trade coins with other users. Essentially everyone places buy or sell orders on an order book (BTC/USD, LTC/ETH, BTC/ETH, etc), and those orders are filled when buyers and sellers are matched up at the current market price.

TIP: Slippage can occur with market and stop orders. Due to this, you’ll almost always want to place limit orders when trading cryptocurrency. This only applies to exchanges like GDAX where one has a choice between order types, it doesn’t apply to buying at the market price via an entity like Coinbase.

TIP: To avoid fees, or to reduce fees, you may need to make use a certain order type. For example, with Coinbase/GDAX, the only way to fully avoid fees is to fund your USD wallet and then trade using limit orders that don’t trigger immediately. In all other cases on Coinbase/GDAX, you are essentially going to be paying fees. Likewise, with Kraken, you’ll pay less if you set a limit order than you will with a market order or stop order. To better understand this, see “maker vs. taker fees.”

What is a market order? A market order is the easiest trade to do, but in-trade generally involves extra fees (see for example maker / taker fees that don’t apply to limit orders). When you buy/sell via a market order you’ll buy/sell cryptocurrency at the market price plus a fee if applicable immediately (you are matched up with one or more other buyers/sellers via the exchange you are trading on until your order is filled at or around the current market price). This can backfire when there the market is volatile, as you can end up buying a lower or higher price than expected, but when the market is active you’ll typically buy at or close to the market price (maybe a few pennies USD off the price you hit buy at). TIP: Market orders may be partially “filled” at several prices. ADVICE: Use a market order when the price is going up or down really quick and you want to jump on or off (trying to set a limit order during a bull run or a crash can be more trouble than its worth).

What is a limit order? A limit order is the smartest trade to do in most cases, because it isn’t subject to “slippage.” When you buy/sell at a limit price, you set the price you want to buy/sell at. The order is executed when a buyer/seller wants your shares. Like with a market order, you won’t necessarily get the exact price you wanted… With that said, with limit orders you’ll sometimes get a price above your limit price (when selling) or below (when buying). In other words, to restate, limit orders aren’t subject to slippage. You’ll either get a better price, or the price you asked for. The danger with limit orders is that if you are trying to take profits, and you set your limit too high (or are trying to buy low and set it too low) you can miss an opportunity to fill your order. TIP: You have to set your buy limit lower than the market price and your sell limit higher than the market price. Otherwise it is essentially a market order (as your limit has already been met). ADVICE: Use limit orders when you can (which should be most of the time). Set the price you want to buy/sell at and then walk away. If you manage limit orders correctly, you won’t have to do much else in terms of trading.

What is a stop order? A stop order (a buy-stop or stop-loss) is when you choose a price higher for selling, or lower for buying, that you want to trigger a market order at (to protect losses or take advantage of a run up). Stops are a smart way to manage losses, but they are also oddly the riskiest of all trades in cryptocurrency in some ways. This is because the market is often volatile. Ever hear about the time ether went to tens cents from like three hundred for a moment and people ended up automatically selling for that price due to placing stop orders? That is because stop orders initiate a market order when you hit the stop price! That means like with market orders stop orders can experience “slippage” (where you buy high or sell low without intending to). If you and everyone else on earth sets a stop for that magic price suggested by popular-crypto-magazine X… that means everyone and their mother will set off a market order to sell or buy at the same time. This isn’t to suggest one shouldn’t set a stop order (you should in most cases), it is only to suggest that one should be careful and think about things like trading volume when setting stop orders. ADVICE: Set a sell stop order at the lowest price you want to sell at (as an exit strategy). You can even set multiple stops to catch different prices. Meanwhile, set a buy stop order if you want to buy when the price breaks out of its X-day moving average (people generally don’t do this, but there is a time and place for it).

The winner: There is a time and place for every order type (even the odd stop-buy). For example, you’ll generally want to place sell-stop orders as a backup plan (even though ideally you don’t want them to actually trigger). Likewise, you’ll sometimes want to do a market order despite the fees and slippage risks. However, in general, limit orders should be your bread and butter due to their reduced fees and lack of slippage (especially if you are buying/selling something with a low volume of trading or a volatile price).

TIP: When you buy from a broker you are generally buying the market price plus a fee (but that “market price” isn’t subject to slippage when using a broker). In other words, you don’t have to worry about the above when you buy on Coinbase (a sort of broker), but you do on Coinbase’s GDAX (an exchange).

TIP: This page covers the aboslute basics of placing orders on an exchange. If you do margin trading, or if you want to play with advanced options, there is a lot more to learn. We’ll create sections on these other aspects of an exchange in the future. For the time being, these basics are all you need to know to trade. Learn more about Entering Market, Limit, & Stop Orders from GDAX (this page also covers “Good ’til cancelled orders,” “day” orders, and other “advanced” options common to exchanges).

Citations

  1. Entering Market, Limit, & Stop Orders from GDAX
  2. Slippage