How Are Limit Orders and Market Orders Different?

Crypto trading is one of the most popular ways of making money with digital currencies, but it’s quite complex, and there are numerous factors you need to consider before buying your first crypto and engaging in trading.

Trading crypto is much different from trading on the stock market. You need to choose the right crypto exchange for your trading operation, learn how the market works, decide which coins you are going to invest in, create a clear trading plan with goals and trading success metrics, and decide how you are going to keep a record of your crypto trades. 

On top of all of this, you also need to choose a trading strategy and stick to it during a certain period of time because if you constantly change strategies and mix different trading order types without any clear ideas of what you’re doing, you’ll end up with a bunch of losses real quick. 

Candle graph crypto trend

The crypto market is super volatile, and coins can suddenly rise or drop in value by several tens of percent within a single trading day. That’s why crypto exchange platforms have numerous trading order types available, which enable users to quickly react to market conditions and open, stop, or limit their trading positions to make sure they are maximising gains and minimising losses.

The two most popular trading order types are market orders and trading orders. Let’s take a closer look at these two order types in order to understand what they are used for.

Market Orders: The Basics

Market orders are the most basic crypto trading orders available on crypto exchange platform apps. In fact, popular exchanges like Binance, Coinbase, and Kraken set market orders as the default order type on the trading interfaces of standard brokerage accounts. You can easily change the order to a different type, but market orders are usually set up by default since a large portion of crypto traders mainly use this basic order type to buy or sell certain crypto at the dominant market price on a specific exchange.

With a market order, you agree to buy or sell specific coins at the current market price based on that crypto’s order book on the platform you’re using. For example, if you want to buy some Ethereum (ETH) on Binance because you think that its price is low so it might prove a profitable investment if you sell it later, and the available price is 2,000 USD per Ether coin, you can issue a buy market order to instantly buy Ethereum at that price. 

In case you’ve been holding Bitcoin (BTC) for some time, but the price of the coin has been dropping in value for a longer period of time and you simply want to save a part of your initial investment by selling BTC at the current market price before it drops any lower, you can do this with a simple sell market order.

Market orders are used when you’re determined to instantly buy or sell a specific digital currency and you don’t want to engage in any complex trading operations that rely on open trading positions, as they can take some time, depending on the market circumstances. 

Benefits and Risks of Market Orders

The key benefit of market orders is their speed. Once you place a market order, you agree to buy or sell crypto at the current market price on your exchange platform, meaning there’s no need to wait for any price changes of your traded assets or for a third party to match the price of your order. With market orders, trades are carried out almost instantly. You only need to wait for the transaction to get processed through the blockchain.

Buying crypto through market order

However, market orders also have downsides. Due to the high volatility of cryptocurrencies, even though you’ve placed a market order at the current price of given crypto, the price might slightly change during the time it takes for the exchange to fulfill the order. This means that you might end up paying a bit more than what you initially agreed on.

Let’s imagine you want to buy Cardano (ADA) for 1,000 USD at a price of 1 USD per ADA, and you’re about to submit your buy order, but due to the volatility of the market, the price of ADA jumps to 1.10 per coin just before you’ve placed your order, which means you’ll end up with less Cardano coins than your initial plan. 

This is a result of the difference between the bid and ask prices is commonly known as the bid-ask spread, which is often unpredictable because exchange platforms need to match your buy order with a seller, and if the price of certain crypto has suddenly changed, your order can only be matched with the new price.

Another potential downside of market orders is the so-called market slippage. If you place a large buy order for certain crypto that has low liquidity, the size of your order might influence the price of the asset, and the exchange will need to divide your order into several purchases. This means you’ll end up buying or selling your coins at a much different price than the initial estimate. 

Limit Orders: The Basics

Limit orders are much different than market orders and although they are also considered one of the basic types of orders, it takes a much broader understanding of how the crypto market works to use these orders efficiently.

Limit orders are used to set up a specific limit price at which you agree to execute your trading order. These orders aren’t carried out instantly like market orders, and they require users to estimate whether certain crypto is going to rise or fall in value and approximately how much, with the help of technical analysis tools and price charts that show the past performance of specific cryptos.

When issuing a limit order as a buyer, you’re setting a price at which you agree to buy certain crypto. Once the price of the crypto reaches that price or an even lower one, your order can be closed. This means that once the price of the coins you want to buy reaches your limit order price, the coins will automatically be bought and delivered to your exchange platform wallet. Sell limit orders work the same way, except that they are carried out once the value of your desired crypto rises up to the minimum price specified in your order.

Setting up limit order

Limit orders are long-term trading orders that can usually be set up for a duration of three months, which is a solid time window for a crypto to rise or fall in value and thus reach your buy/sell zone. Many exchanges also allow users to open limit orders with an indefinite duration period and even set up your own custom order duration, which allows you to wait for a crypto to reach an even better execution price than your initial estimate. These orders are also referred to as good-til-cancelled (GTC) because they can stay open until you manually close them.

Benefits and Risks of Limit Orders

A key benefit of limit orders is the fact that you can always specify the exact price at which you’re willing to buy or sell crypto, which means that you have much more control over the fluctuation of bid-ask prices and can minimise the impact of market spreads. You won’t be finding yourself in unpleasant situations, such as receiving much less crypto than you’ve expected for a certain amount of fiat currency, which is a common situation with market orders.

With limit orders, you can set your own price and control the order fulfillment procedure. If you’ve been planning to buy a specific coin whose price starts to fall, you can place a buy limit order at a specific price that marks the entry point of your buy zone, and then either accept an automatic order fulfillment once the coin reaches that price or let the price fall even further and then manually close the order. The same can be done if you want to sell some crypto and have a certain minimum selling price in mind. Once the target price has been reached, you can prolong the execution of the order if you think the crypto can reach an even higher price.

A downside for limit orders is the fact that they can take quite some time to get fulfilled, and due to the high volatility of the crypto market, it’s possible that your order won’t get fulfilled at all. 

Additional Order Types

Apart from market orders and limit orders, there are two additional order types that are considered basic trading orders.

Take-Profit

Take-profit orders are a very useful tool for taking crypto gains and closing an open trading position. When you set a take-profit order, you’re specifying a target price at which your trading position is going to be automatically closed by selling the assets in question for that price through an automated market order. 

Target market price

The difference from classic market orders is that a take-profit order is triggered by a certain price and you don’t need to do anything manually.

Stop-Loss

Stop-loss orders are designed to limit your losses during highly volatile market periods. When issuing a stop-loss order, you’re setting a stop price at which the exchange platform is automatically going to sell your crypto if the token’s market value falls down to that specific price. 

This is an incredibly useful order type for minimising losses because you can’t monitor the crypto market 24 hours a day, and that’s exactly why a stop-loss order is useful for saving you from unnecessary losses that could happen outside of your trading hours.

A Few Ending Words…

Crypto trading is much more than market orders and limit orders, but understanding these few basic order types is essential before starting your own crypto trading operation. Mastering all the technicalities regarding crypto trading can take years, but if you manage to grasp how these basic trading orders work, you’ll have enough knowledge to engage in basic trading activities.