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 Basics of Market, Limit, and Stop Orders in Cryptocurrency Trading

In simple terms:

  • A market order attempts to buy/sell at the current market price. It buys or sells “right now.” What it does is it buys or sells available limit orders sitting on the books right now. Thus, slippage may occur (where you get a slightly higher price with a buy market order or slightly lower price with a sell market order). In very volatile times, slippage can be substantial. You’ll pay a fee for a market order as a rule of thumb. You can set a market buy or market sell.
  • A limit order places an order on the order book in hopes that it’ll be filled by someone else’s market order. When the market price reaches that price, it’ll buy or sell (AKA “fill”) if there is a buyer or seller. With the exact mechanics of exchanges aside, the basic concept here is that someone else is placing a market order and that a buy or sell will fill your limit order. Limit orders aren’t subject to slippage and sometimes have lower fees than market orders. You can set a limit buy or limit sell.
  • A stop order places a market order when a certain price condition is met. So it works like a limit order, in that it goes on the books, but it buys or sells like a market order. Stop orders are therefore subject to the same fees as market orders and are subject to slippage. You can set a stop buy or stop sell. A stop sell order is also known as a “stop loss.”

With that covered, people will likely want to know which order they should use. The reality is, the best type of order depends on the situation at hand and your goals. However, since getting to pick your exact price to buy/sell and avoiding fees is attractive, it can be smart to attempt to use limit orders primarily.

The Basic of the Order Book, Fees, and Slippage

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 (trading “pairs” like 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: To avoid fees, or to reduce fees, you may need to make use of certain order types. For example, with Coinbase/GDAX, the only way to fully avoid fees is to fund your Coinbase USD wallet, send the funds to GDAX, 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” (not every exchange uses this fee structure, so please see exchange specific fee structures).

TIP: Different exchanges use different names for things. Not all stop orders are called stop orders, not all exchanges use the terms marker and taker, etc. So keep an eye out for similar mechanics by different names. Market and Limit are common terms, some of these other terms aren’t.

Market, Limit, and Stop Orders in Detail

What is a market order? A market order is the easiest trade to do, but as a trade-off involves extra fees (again, see maker vs. taker fees for an example). When you buy or sell via a market order, you’ll buy or sell cryptocurrency at the market price plus an immediate fee, if applicable. You are matched up with one or more buyers and sellers by the exchange you are trading on until your order is filled at or around the current market price; you are buying/selling limit orders. This can backfire when the market is volatile. You can end up buying or selling at a lower or higher price than expected, but when the market is active and steady you’ll typically buy and sell at, or close to, the market price. TIP: Market orders may be partially “filled” at several prices. ADVICE: Market orders are the best when there are a lot of buyers and sellers and there is little to no spread. This helps ensure you will buy / sell at or around the market price. Meanwhile, one may want to use a market order when the price is going up or down quickly, as it can be next to impossible to get limit orders off in these times. Sometimes it is worth the slippage to get a market buy or sell in during a bull run or crash, but its generally better to plan ahead and avoid being in this situation. The bottomline here is that market orders require some extra considerations in the cryptocurrency market due to the low volume of some markets (low volume = higher risk of slippage).

What is a limit order? A limit order is the smartest trade to do in most cases because it isn’t subject to “slippage” (you get to define your price). 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 coins. 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/low you may 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 about trading. A good tactic is tiering your limits. For example, if you bought X-coin at $275 and want to sell at $300, set sells at intervals between $290 – $310 (if they all fill the average will be $300, if not, then at least you get some sells off). TIP: You can use bots to trade. There is a risk and a learning curve, but they can be useful for placing tiered limit orders and avoiding having to place stops. TIP: With limit orders, you can usually pick between fill-or-kill (either fill the whole order or none of it) or partial fill (which will fill only part of the order if that is all that can be filled). Partial fill is often the best choice, but not all exchanges give the option and the best choice for you depends on your goals.

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 or the ensure you get a buy in, but they also cary some risks. The risk come from that fact that the market is often volatile and sometimes there is low volumes. Did you hear about the time Ether went to tens cents from something like three hundred for a moment? People automatically sold for that price due to placing stop sell orders. That is because stop sell orders initiate a market order when you hit the stop price. That means, as 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 you shouldn’t set a stop order; you should in most cases. It is only to suggest that you 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). TIP: You can use trading pairs to avoid using stops (although this only works if one coin goes down or up relative to another). What you do is, for example, set Ether to sell to Bitcoin if Bitcoin goes down or Ether up, and Ether to Bitcoin if Bitcoin goes down or Ether goes up. This way you protect your coins without ever going to USD.

The winner: There is a time and place for every order type (even the odd stop buy order). For example, you’ll often want to place sell-stop orders as a backup plan (even though ideally you don’t want them to 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). Simply put, there is a time and a place for every order type, but generally if you can choose, a limit order is the best and cheapest choice on many exchanges this is especially true on GDAX due to the maker/taker fees).

TIP: This page covers the absolute 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 canceled orders,” “day” orders, and other “advanced” options common to exchanges).

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Citations

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