What are trade orders?

Trade orders are a general term for the various types of transactions traders can use when buying and selling assets, including cryptocurrencies.

Different cryptocurrency market events call for different trading strategies. To cater to these scenarios, many cryptocurrency platforms offer a variety of trade order types.

These allow traders to instruct platforms to do much more than simply "buy/sell X digital asset now at current price." Factors such as the execution, duration, and profit/loss parameters of a trade are all configurable via different types of trade orders.

Oftentimes, the difference between novice and experienced market participants is how they utilize different order types to maximize their particular investment strategy.

A limit order in financial trading is an order to buy or sell an asset at a specific price or better. This type of order is used to control the maximum price the trader is willing to pay or the minimum price they are willing to accept for the asset. Traders use buy and sell limit orders to protect against sudden price movements and to make sure they get the best possible price for their order.

A limit order is one of the most common types of trade orders.

If no counterparty order is available to fill the trade immediately, a trader can leave their limit order open until it's filled, canceled, or expires.

Setting a limit order allows a trader to predetermine the minimum price they will receive for selling an asset or the maximum price they will pay when buying an asset.

For example, a person might wish to buy $1,000 worth of Bitcoin (BTC) at a market price of $25,000 per BTC. To do this, they could place a limit order and include these parameters.

In some cases, such as when a sell order exists on the order book with enough volume to fulfill the trade at a lower price than the buy order requested, the limit order can still execute at a better price than the trader initially set. If an order at a more favorable price doesn't exist on the order book, then the trader can opt to leave the limit order open until it is filled, canceled, or expires.

A market order executes a trade immediately, at the best available market price.

Market orders allow traders to enter or exit the market immediately by buying or selling into the order book’s best-priced counterparty orders at the time. Depending on order book depth and liquidity, the difference between the quoted price of the market order and the trade execution prices can vary significantly. This difference between an asset’s current market price and a trade’s average execution price is called slippage.

Market orders are often preferred by traders that are more concerned with speed and certainty when entering or exiting fast-moving markets than they are with the exact price they receive.

For example, a trader wants to exit their Ether (ETH) position as quickly as possible. This decision might be in response to a macroeconomic change, a breaking news article, or a sentiment shift. They decide to place a market order to sell 50 ether (ETH). If the order book contains large bids (buy orders) near the current market price, the trader could exit the market with low slippage. For a 50 ETH buy, the opposite would be true if there were only a few, smaller-sized asks (sell orders) on the order book.

A stop-loss order is a type of order used in financial trading to help limit losses on a position in an asset. A stop-loss order seeks to limit loss on a position by selling the asset when the price reaches a certain level. The price at which the stop-loss order is set is known as the stop price. If the price of the asset reaches the stop price, the system triggers the order which sells the asset at the current market price.

You can think of these orders as safety nets that may help to minimize your downside risk. Traders use stop-loss orders to try and protect their trades against unexpected moves. It’s worth noting, however, that stop-loss orders do not always work as expected. Technical errors and low liquidity are examples of factors that can affect the execution of stop loss orders.

A trader successfully purchases Dogecoin (DOGE) at $0.07 per coin, but is concerned about high market volatility. To limit their downside risk, they place a stop-loss order at $0.05 per coin. If the price of Dogecoin falls to or below the stop-loss trigger price, the stop-loss may close the trade. If the market falls sharply and there are insufficient opposing orders to fill the stop-loss trade, it could fail.

This type of order combines the features of a stop-loss order and a limit order.

stop-loss limit orders (or stop-limit orders) provide a degree of convenience for traders and reduce the need to place two separate orders.

A stop-loss limit order seeks to limit losses on a position. It is an order to buy or sell an asset when it reaches a certain price, known as the stop price. When the actual price reaches the stop price, the order becomes a limit order to buy or sell at the limit price or better. This type of order is used to protect against further losses if the price of the asset moves in an unfavorable direction.

A trader may set a trigger price and a limit price to define a specific price range for order execution. stop-loss limit orders are useful when traders want to limit losses and control the minimum price they want to execute the trade at.

For example, a trader has an open long position on SOL and decides to set a stop-loss limit order in the SOL/USDT market. In this example, the price of SOL is currently at $20. The trader decides to set the stop price at $18, and the limit price at $17.80. If prices hit the stop trigger price at $18, the trading platform will place a limit sell order at $17.80, or better.

Stop-loss limit orders may allow a trader to exit the market if an asset’s price begins to fall.

If you are already in a position, a trailing stop order enables you to protect unrealized gains, by automatically trailing a stop as the market moves in your favor. Trailing stops sit behind the current price by a predetermined buffer, or “offset,” which the trader decides at inception. 

The offset can be entered as either a percentage or a dollar amount. Traders can also choose which reference price they want to use as the trigger signal for the stop; the Last Price, the Mark Price, or the Index Price. 

As trailing stops are conditional orders, once the market retraces back to the offset, the stop is executed as a market order and the position is closed. Therefore, the average price that the position closes at will depend on: a) The liquidity in the order book at the time of execution and b) When the market decides to retrace back to your stop. 

Note that trailing stops will only ever move when the market moves in your favor, not when the market retraces against you. This means that if a trade accumulates a significant unrealized gain after a sharp move, the potential to give back any of those gains is capped by the trailing stop, as the market can only retrace so far before the position is closed. If a trade continues to move in your favor for an extended period, the trailing stop will repeatedly move up with it, until the market eventually retraces far enough to close the position. 

Let’s imagine a scenario where a trader might use a trailing stop. The trader in question is looking to buy Bitcoin (BTC) at $50,000. After getting filled by a limit order, price quickly moves up, and the trader decides to protect the position with a trailing stop. Looking at the Average True Range (a measure of volatility), the trader decides to trail a stop $2,000 behind the current price of $51,000. Bitcoin’s price experiences a sharp impulse up to $58,000 the following day, before immediately retracing back to $50,000. However, as the trader used a trailing stop, the position was closed at just under $56,000 after a small amount of slippage, preventing the trader from giving back all of the unrealized gains. 

The benefits of using an automated stop means that once a position is filled, the trader does not have to manage the trade. If a trade works after entry, it will remain open until the market reaches a take-profit order or it retraces to the offset. While trailing stops are by their very nature dynamic—reacting to the ebb and flow of a market—traders can optimize the use of these orders by backtesting the optimal offset for each digital asset.

Such a systematic approach may be beneficial for traders that over-manage trades or cut winning trades too quickly. Trailing stops also ensure that every trade is risk-managed, as from the outset potential losses are capped (fees and slippage notwithstanding).

Iceberg Orders allow you to place limit orders without revealing the size of the whole order.

The name is a good reflection of how they work; when an Iceberg Order is placed, other traders are only able to see a fraction of the order size - the tip of the iceberg. The remainder and larger portion of the order remains beneath the surface, and does not show up in the order book.

The purpose of Iceberg Orders is to conceal the size of a desired position. This is particularly useful for traders looking to enter large positions without revealing to anyone that they wish to do so. There are a handful of reasons why a trader might wish to operate in this way:

• Smaller traders often frontrun larger traders by placing bids in front of their orders to ensure they get filled first. This may result in the larger trader only getting a partial fill when trying to enter a large position. Because Iceberg Orders only show a small fraction of the whole order, other traders likely won’t suspect anything until a significant portion of the order has been filled. 

• Iceberg Orders allow bigger traders to slowly accumulate or distribute a digital asset without alarming other market participants, which may impact their ability to get in and out of a position effectively. 

• In some thinly-traded markets, entering via a market order may result in a much poorer average execution price. Because Iceberg Orders are passive limit orders, while they might stall a market temporarily, they cannot actively move the market. Therefore, combined with the stealth of being mostly invisible to other traders, Iceberg Orders may allow for a much better overall entry.

As an example, let’s imagine that a trader wants to buy 1,000 Solana (SOL) at $100.

Rather than using a market order (which may incur slippage) or using a regular limit order (which may get frontrun), the trader decides to place an Iceberg Order.

The trader completes the ticket, opting for a Display Quantity of 100 SOL - this is the amount that will be visible in the order book. The remainder of the order, 900 SOL, will be hidden.

In this scenario, the price of Solana dips down to $100 and stalls as other traders sell into the visible bid of 100 SOL. Despite multiple market sell orders, the order of 100 SOL remains in the order book and the price continues to stall at $100 (the Display Quantity for Iceberg Orders remains the same until the entire order is filled).

Other traders start to become suspicious as to why this supposed order of 100 SOL has not yet been exhausted. Before they have a chance to react, one final flurry of panic sellers eat into the last 100 SOL of the Iceberg Order, and the position is filled. Shortly thereafter, with sellers losing steam, the price begins to rally.

A take profit order is a type of order used to close a position when it reaches a certain level of profit.

Traders use this order type to lock in profits when the market is moving in the trader's favor. A trader can choose to set a take profit order at a specific price or at a certain percentage of the current market price. Once the system triggers the order becomes a market order to sell, closing the position and realizing the profits.

This type of trade order may be useful for traders that want to lock in gains at a target price.

These orders execute for the trader when the market price meets the trigger price.

For example, let's say a person holds 100 MATIC tokens and believes prices will rise to $1. They decide to set a take profit order at $1 to sell 50 MATIC at market when the price reaches that level. This way, the trader can realize gains and scale out of their position, regardless of whether they're online or not.

Take profit limit orders combine the features of take profit and limit orders.

These require a trigger price and a limit price to define a specific price range for trade execution once the target price is reached.

A take profit limit order is a type of order to close a position when it reaches a certain price level. This order is used to lock in profits when the price of an asset reaches a predetermined level. The trader places an order at a price that is higher than the current market price. If the price reaches its limit, the system executes the order and closes the position. Traders may use this order type to protect profits and limit losses.

These orders may be useful when traders want to secure profits and exit a position at a specific price or better, once prices reach a set target.

For example, a trader might set an ADA/USDT take profit limit order with a trigger price of $0.37 and a limit price of $0.36. The order activates if the price reaches $0.37, and executes the trade at a limit price of $0.36, or better. However, if ADA/USDT fails to reach the target price, the order will not trigger and the position will be left open.

These order types may offer traders flexibility in managing their trades, allowing them to enter, exit, and protect positions according to their trading strategies.

When using different order types for trading, there are several factors to consider to make more informed decisions.

Check out the Kraken Learn Center’s article, A brief introduction to technical analysis, for a more complete overview, but here are some key factors to keep in mind:

• Price patterns: Identify and analyze various price patterns, such as trend lines, support and resistance levels, chart patterns, and candlestick patterns. These patterns can sometimes provide insights into market sentiment and potential future price movements.

• Indicators: Use technical indicators to gain additional information about the market. Examples include moving averages, relative strength index (RSI), stochastic oscillator, MACD (Moving Average Convergence Divergence), and Bollinger Bands. These indicators can help identify trends, overbought or oversold conditions, momentum, and other relevant data points.

• Volume: Consider the trading volume involved with price movements. Higher volume often confirms the strength of a trend or indicates the presence of significant market participation. Conversely, low volume may suggest a lack of interest or potential reversal.

• Timeframes: Analyze price action and indicators across different periods of time, such as short-term (intraday), medium-term (daily or weekly), and long-term (monthly or quarterly). Different timeframes may reveal different trends and patterns, providing a more comprehensive view of the market.

• Market context: Consider the broader market context and macroeconomic factors. Analyze the overall market trend, economic indicators, news events, and other factors that could impact the price movement of the asset you are trading.

• Risk management: Implement sound risk management strategies, including setting stop-loss orders, determining risk-reward ratios, and position sizing. Technical analysis can provide useful entry and exit signals, but managing risk is crucial to protecting capital and limiting potential losses.

• Backtesting and validation: Test and validate your trading strategies using historical data. Backtesting involves applying your technical analysis approach to historical price data to assess its effectiveness. This process helps refine your strategies and gain confidence in their potential success.

• Psychological factors: Recognize the influence of psychological factors on trading decisions. Emotions such as fear, greed, and impatience can impact judgment. Maintain discipline, stick to your trading plan, and avoid making impulsive decisions based on short-term fluctuations.

Remember, technical analysis is just one tool in the trading arsenal. It's important to combine technical analysis with fundamental analysis, market research, and other sources of information to make well-rounded trading decisions.

Now that you have learned all about the different types of trade orders at your disposal, are you ready to take the next step?

Kraken Pro allows you to execute your trading strategy using each of these trade order types. 

Sign up for a Kraken Pro account today to put your trading knowledge to work.