Trading Basics

In the early stages of civilization, trades were exercised in markets by transferring goods or services from one person to another, often in exchange for another kind of goods, services or money. Nowadays, trades happen all the time, all around us. If you need water, you go to the store and buy a bottle of water. In these everyday cases, you are simply trading money in exchange for a bottle of water.

The trading that happens on crypto exchanges is very similar to the concept of buying water in a physical store. Let’s say you have 100 euros in your Lykke Wallet and you want to buy Bitcoin. In your Lykke app you will exchange your 100 Euros for the equivalent value in Bitcoin.

We provide the technology and the environment for you to be able to exchange these 100 euros for an equal value of Bitcoin. You may think that you are buying bitcoins from Lykke itself but in fact this is not the case. Lykke offers you the possibility to buy bitcoins while also offering other users the possibility to sell assets. Let’s go back to our previous example, on one hand we have one user willing to buy 100 euros in Bitcoin, and on the other hand, we have one user willing to buy euros selling bitcoins.

Lykke provides the platform and the technology for that exchange to happen, in other words, we bring together the seller and the buyer.

There are several trading modalities, we will try to simplify them so we can differentiate 2 ways of trading:

• Long-term investment

In this type of trading, you invest your funds in assets for the long run. This means that you will likely wait months or even years to get returns back. This type of investment requires research and investigation, as well as knowledge of the asset you are buying.

• Short-term investment

Short-term investment runs more on the speculation of the asset you are trading and the market volatility. Therefore, it is extremely important to be aware of the market conditions and speculations within the market. Normally, traders are constantly checking their short-term positions, because in case the price moves up or down they can take profit of the market.

Speculation is made by individuals across social networks, companies and countries through actions or statements. You may be thinking, how can speculation affect the price if it is only speculation? Well, it is more complex than that. If someone says that the price of “X” asset will go up and after a period of time everyone says the same through repetition, this will create a mass effect and eventually will convince people to buy. Because the price goes up as the demand grows, the people holding this asset take advantage of the situation and sell it, thus taking advantage of the situation to make a profit. The opposite will happen if the price goes down: everyone will be selling their assets to cut losses, there will be plenty offers and low demand. In this situation users buy low and wait for the price to go up again, taking profits buying low and selling high.

Placing your first order.

At this point, you have decided which asset you will buy and if this will be a short-term or a long-term investment.

There are 2 ways to buy or sell assets:

• Limit Order:

With a limit order you are able to specify the volume of the order and the execution price.

• Market Order:

With a market order you are only able to specify the volume of the order, as the execution price will be set by the market at that precise moment.

Market orders will be executed instantaneously as they will be fulfilling the conditions of the current market at the price available at the moment. However, limit orders have no time frame for when they will be completed as you set your triggering price which may or may not become available. The triggering of the limit order depends directly on the users placing opposite orders in the market.

To understand market orders we need to first explain limit orders and how the order book works.

Limit orders are specific orders in which you set the price and wait for another user to match the order partially or entirely. Once you place a limit order, it goes to the order book where it will wait for completion.

Please take a look at the following example of how the order book works:

There are orders in the order book, let’s say BTC/EUR:

Order 1: Sell 1 BTC at 10 000 EUR.

Order 2: Sell 1 BTC at 15 000 EUR.

Order 3: Buy 1 BTC at 9500 EUR.

You want to buy 3 BTC at 12500 EUR and you set a limit order. Your order will be partially matched with Order 1 with the price of 10 000 EUR, but you still need to buy 2 more BTC to complete your buying limit order. Therefore, your order is going back to the order book.

At the end the order book will have the following orders:

Order 2: Sell 1 BTC at 15000 EUR.

Order 3: Buy 1 BTC at 9500 EUR.

Order 4: Buy 2 BTC at 12500 EUR — your Limit order

In this example, we may say that the order book is like a pyramid with layers in which the orders are sorted by price and the orders on the top will be completed first.

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On the other hand, we have market orders, in which you do not specify the price. The price is set by the market, which in this case is the top order from the pyramid.

Imagine you want to sell 100 ETH with a market order but the first order in the pyramid offers a volume of 5 ETH (You still need another 95 ETH) In this case, your market order will fulfill the first order and then will move down to the next layer (the second order). If your volume is still not fulfilled with the second order, it will go layer by layer to the third order and further. This will go on until your market order volume is completed. This is almost like a waterfall or cascade with the amount of your order that is not filled by the first layer being filled by the next layer after that and so on.

These layers are the limit orders from the order book and the price of the layers is the price from the orders in the order book.

To sum up, if you place a market order to sell 100 ETH, the first order with 5 ETH will be executed at the price that was set for that layer, then it will go to the second order and the corresponding volume will be executed at the price of the second layer. The same will go on until you have completed all the volume you want to sell.

Because of this, we recommend using limit orders as you can specify the execution price. Otherwise, you may get prices that are not at the apex of the pyramid as you will be completing orders from different layers (depending on the volume).