With idap.io introducing a consolidated derivatives ecosystem for crypto assets and a ‘point-and-click’ ladder trading interface, it becomes natural to include various kinds of orders to ensure a seamless and strategic trading experience. In this post, we will take you through the order types possible with the IDAP Trader and some of the associated terms for helping grasp order execution through the Desktop Trading Interface.
Conditional orders are orders that execute under specific conditions, letting traders automate trading to some extent and eliminating the need for watching markets 24/7. More so, by setting up conditionals to either buy or sell, a certain degree of emotion is also removed from the process, enabling a more objective approach to trading.
1. Market Orders
These are buy or sell orders that are executed immediately at the current market price. For instance you want to buy 0.5 BTC and the market price for it is $3400. If you place a market order it will get executed instantly as there is a seller offering 0.5 BTC at that price. It is the same for a market sell order, except here you selling your 0.5 BTC at the market price.
2. Stop-loss Orders
These are automated sell orders that become market orders once the price falls to the value set in the order. Stop-loss orders help minimize loss in a falling market. Let’s understand through an example. Suppose you have 1 BTC currently having the market price of $7000. You hope the price will go to $8000 or more in the next month. However, there are chances that the price also dips and you do not want to bear too big a loss. So you place a stop-loss order at $6500. If the market falls to that price, your order will become a market order and if the current bid is $6489 at that time, it will execute and your 1 BTC will be sold at that price. Note that the stop-loss order hits the market at the value you set it, but won’t necessarily be executed at the exact same price as the market price may have moved by the time your order becomes a market order. If you set the price trigger for a sell-order above the market price, it is called a take-profit order.
3. Limit Orders
With limit orders you can buy or sell your instrument at a specific price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. A limit order is not guaranteed to execute. If there are no buyers or sellers for your order at the price you specified, it may not get filled, however, limit orders let you be precise with your trade. Say you have 4 ETH and the market price is $700 per token if you want to sell. You place a sell limit order at $730 per token. Now your 4 ETH will only be sold if the price shoots to $730 or more.
4. Stop-limit Orders
This type of conditional order combines the features of both stop orders and limit orders, lending higher precision to the trader. In this case you have to set two prices, one called the activation price and the other called a limit price. Again we consider an example. Suppose you have to buy 5 lots(1 lot=1 unit)of a Futures contract for BTC at $7200 per lot. You want to buy only if the price begins to rise. So you place a stop-limit order for 5 lots, setting the activation price at $7300 and a limit price at $7350. When the market hits $7300 mark, the limit order will get activated and your buy order for 5 lots will get filled as long as price is below $7350. In case it shoots above that mark, your order will not get executed. This way you can control when you exit or enter a trade.
5. Trailing Stops
Unlike a stop order, where you set a price above or below the market price depending whether you are going short or long, with a trailing stop, you set the stop as a percentage of the the market price. This allows for more flexibility, as a trade to remains open and continues to profit as long as the price is moving in the investor’s favor but the trade is closed if the price changes direction by a specified percentage. If you set a trailing stop for a sell order for 1 BTC trading at $6500 market price at 2%, then the stop order will trigger at $6370 at current price. However, if prices climb to $8000, then your 1 BTC will only be sold if prices fall below $7840. This way, your gains will be preserved but losses will be minimized.
These are three-component conditional orders. They comprise of a main order (i.e. the buy or sell order), a stop-loss order and take-profit order. Since the main order is accompanied or bracketed by the other two orders, these are called brackets. Consider that you want to buy 1 BTC at $6800, stop your loss at $6000 and book profit at $8000. So you set the buy at $6800, stop-less at $6000 and take-profit at $8000. This way your trading has become semi-automated and you can buy, ensure profits and minimize loss, all in a single click.
A large single order that has been automatically divided into smaller limit order so that the actual order quantity remains hidden is called an iceberg. Just like an iceberg, only the tip , i.e. a small portion of the order is visible on the market, while the bulk stays hidden. This is favorable for institutional investors, who get to buy and sell large quantities without causing major shifts in the market and driving prices too steeply in either direction. Moreover, by automating the trade, multiple orders don’t have to be entered manually for execution.
One-cancels-other (OCO), one-sends-other (OSO)and one-cancels-all (OCA) are conditional orders, where depending on the execution of the first order, another or several other orders either get executed or get cancelled automatically. These conditional orders come in handy for traders looking to deploy strategies to trade the markets with maximum efficiency.
A good-till-canceled order remains in effect until filled or is manually cancelled. This again is a type of conditional order.
The purpose of this post is to give new traders a starting point to learn about order execution. Using our Simulated Trading Environment, beginners will be able to try out all the above-mentioned order types.
Next time, we will talk about Trading Strategies and how different order types help with their deployment.
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