It is very simple to enter and exit a position, push the buy button to enter and the sell button to exit a certain position, but trading in this manner is not efficient and presents quite the risk. If you’re dedicated on trading in this particular way, you will get thrown away from your prospected prices, simply due to slippage and trading without a stop loss order, which serves to protect you in a sudden market short.
Slippage refers to the difference between expected and filled prices. Slippage is a serious issue that needs to be addressed especially in volatile and low volume markets. There are ways to minimize this risk, by exactly specifying prices for trades.
Stop loss orders on the other hand are strictly orders for exiting trades, and they are used to limit the amount of loss. They work as a barrier of sorts, meaning that the trader’s market share will be sold at a pre-selected price. This order can be placed as soon as trade has been established. Especially important in volatile markets, where a trader’s limit can be exceeded in a matter of seconds of market entry.
Trading is an activity that requires high levels of accuracy, so the order types that you utilize will have a strong effect the performance of your trade strategy. Let’s take a look at the different order types you can issue to the exchanges.
These are trades that you enter when it’s expected to profit in the future, due to rising prices. These are considered as limited investments, because the amount you can lose is equal to the amount invested. This is the most common type of order.
This type of trade is an exit trade and is established with the expectation of profit from a diminishing market price. You can enter a short position by borrowing against leverage from the exchange, 1:3 or 1:10, rather more leverage, means less risk. The loss from a short could be unlimited, as a spike in the currency’s worth can go on forever.
Once reaching the target price, you buy back the Stock and pay back your debt to the broker, in traditional markets, protected by a central authority.
This is typically not possible with Bitcoin due to its irreversible nature. But some sites like Predictious prediction market, makes it possible to bet against the price of Bitcoin after a certain period. Other ways to short is through binary option or margin trading on Bitfinex.
One of the most basic order types is the market order. It simply gives the instruction to buy or sell at the best price available. Sometimes exchanges have buy and sell sections on their websites that allow you to choose the price of an order at the BID or ASK, rather first purchase or sell order. These types of orders guarantee a fulfillment of trade, but you should only use this when you want to quickly enter or exit a particular market. These order do not guarantee price, and they are under the effects of slippage. Limiting the use of market orders only to liquid markets will support and limit loss from slippage.
An order that instructs to buy or sell at a specified price or better. Buy limit orders can only happen at the pre-selected price or lower, while sell limit orders are the opposite. Unlike market orders, limit orders allow you to specify the price at which you want to buy or sell. Limit orders prevent the negative effects of slippage, but they don’t guarantee a trade. They will only be filled at a specific price, and potentially limit your earnings by missing qualified trading opportunities if the price almost reaches your threshold, before changing direction. Please note that your order might not be filled even if the market starts to operate at your specified limits, due to the low volume of trades and because of this some exchanges allow your order to be filled periodically, while giving priority to the first orders that were set. This means that if you are the first one to place a sell order at 3100 satoshi, when the market reaches that price your order will be the first one filled.
This order is a conditional state which transforms into a market or limit order after reaching a certain price, called the stop level. Placing these orders is different from simply placing a limit order. Stop orders for buying are placed above the current state of the market, while a stop order for selling is placed below the market. Once the stop level has been reached, the stop order is converted to a market or limit order automatically and in a way a stop order is simply a trigger for market or limit orders. Following this, there are stop-market and stop-limit orders, which are quite self-explanatory.
One of the features of stop orders is the trailing stop, which is a dynamic order that allows the trader to follow the price in order to lock in profits. Not all cryptocurrency exchanges feature this, but in the regular stock markets, the trader would be required to set a range of prices which would be filled automatically by the system, going up when selling and going down when buying. This means that orders will be created at equal levels between the set price-range and the trader benefits from wider market presence.
Stop Loss Orders
One of the most applicable ways to use stop orders is to create a risk barrier for a trade. In other words this means that you’ve created a stop loss order, which is set at the limits where you as a trader would feel protected against market failure.
Advanced orders which form the basis of trading automation, allowing you to conditionally submit or cancel them depending on the state of the market. They are placed before actual trading takes place.
While quite different than regular markets, cryptocurrency trading platforms offer some sort of duration qualification for your trade orders:
- The default for most platforms is Good-Til-Cancelled (GTC) which is an option that makes the order remain active, until you manually cancel it or it is filled by an opposite trade order on the market.
- Usually the other option is Immediate-Or-Cancel (IOC) basically saying that if the order can’t be filled immediately it will be canceled. Partial fill is possible though, so you might buy-out a specific price and cancel using this option.
As you can see so far, trading is a vast subject to explore and educate yourself about. Taking the time to do so will greatly benefit your efforts as a trader, making you more informed about specific trading knowledge, which we hope will give you the necessary confidence to actively trade and achieve profitable success.
In one of the next articles we will examine the development and future testing of trading plans, which are necessary documents that you as a trader need to create for your own business. They allow elimination of some of the risk with trade and the generation of consistent long term profits. In other words, by using a trading plan (which you absolutely should), you allow yourself to persist longer in profitable markets and to do so with solid, fact based information that you’ve managed to extract with your plan and the testing activities upon it.