Club5050-Basic Concepts Of Technical Analysis (Part 2).
Hi everyone.
Hope everyone of you is doing great. I’m good as well. Today I want to continue with the part 2 of my last post which was all about “understanding the basics of technical analysis”. I went through some of the basic concepts you will come across when dealing with the crypto market and I am here to publish the continuation of that post.
Today, I will be talking more on what stop loss order is, what limit order is and what market order is. Basically, this is what my content will be made of today. For those who could not get access to the first post you can check it out here.
A market order can be simply referred to as an order at which an investor or a trader decides to buy or sell at the best currently available market price. It is normally the quickest way to enter or exit a market.
Market order needs liquidity to be completed. This simply means, the market order is executed with regards to the limit orders already placed in the order book. Setting up a market order is the best option for you when you want to purchase or sell your crypto asset instantly. But have in mind that market orders and limit orders are two different things all together.
Setting a market order indicates that you want to execute the order at the best price you can get at that instant. After you are done setting up a market order, your order keep filling orders from the order book till the entire order is completely filled. This is usually why whales (large traders) can have a significant influence on the price when they use market orders. I talked about the order book in my previous post.
Limit order is an order created to trade (buy or sell) an asset at a particular price. This price at which the order is created to buy or sell is called the limit price. When you place a limit buy order, it will be executed at the limit price or a higher price than the limit price. As well as when you place a limit sell order, it will also execute at the limit price or a price lower than the limit order.
Setting a limit order simply means that you are wishing to execute your order at a specific price or a better price than your limit order but not anything less than that.
One essential thing about a limit order is that, it enables you to have more control over how you enter and exit a market. It assures you that your order will only get completed with the price you allocate for it or a better one as compared to your price but not the vice versa. But one thing you should also have in mind is that, after placing an order to get executed by the market at a particular price, the market may never reach that your price, leaving your order unfilled, hence making you to lose on potential trade opportunities.
As I mentioned earlier, there is a difference between market order and limit order and making a choice on which one to use can vary depending on the type of trader you are. In some situations, traders may use all the two trading techniques while others also prefer one to the other. What is much important is to understand how each of them work so that you can choose for yourself which one to use.
Below are some of the key differences between market order and limit order.
• Limit order is use to set the maximum or minimum price at which a trader is willing to sell or buy an asset. In limit order, the order only gets executed once the price at which the order was set is triggered while in market order trades are meant to be executed instantly or at that moment at the current market price.
• Market order basically do with the order’s execution, having the trade’s speed to be more important than the price of the asset but limit order basically do with the price and trade will not be filled if the value of the security is outside the boundaries of the limit order.
• Market orders placed when trading time is over will be filled at the market price and continue on the next trading day but limit orders placed after market hours are kept into a queue for processing immediately the trading resumes.
Now that we have got to understand what market and limit orders are, let’s now talk about what stop-loss orders are. Stop-loss order is a form of limit or market order that only activate when a particular price is reached or triggered. This price is termed as the stop price in general.
The reason behind a stop-loss order is mainly to minimize losses. It is always advisable to attach an invalidation point to your trade, which is a price level that you will define in advance. This level is usually where you realize that your initial idea was wrong, hence you should have exit the market to prevent further losses. So, the invalidation point is normally where you indicate your stop-loss order to avoid further losses.
As I have stated earlier in the explanation of what stop-loss is, it can be both a limit order or a market order. That is why we normally see stop-limit and stop-market orders respectively. The main thing you need to understand is that the stop-loss only activates when a particular price is reached or triggered (the stop price). When the stop price is triggered, it activates either a market order or a limit order.
Furthermore, there is one thing you need to keep in mind. We now know that limit orders only fill at the limit price or a price better than that, but never the other way round. Using a stop-limit order as your stop-loss can instantly move away from your limit price when the market crashes violently, failing to fill your order. However, the stop price would reach your stop-limit order, while the limit order keep being unfilled due to the quick price drop. This is usually why stop-market orders are considered safer and better than stop-limit orders. They give assurance that even under serious market situations, you can be able to exit the market once your invalidation point is triggered.
As we can all see now, both market and limit order are two different trading techniques which have advantages and disadvantages and the final decision is based on the trader or investor. Although, limit order gives a fixed price range of how you want to sell or buy an asset which makes it costly to use and market order is seen to be easy when executing a trade and can be very tricky during a volatile market.
I have come to an end of today’s discussion which is the continuation of my previous post. Hope you all have been able to understand something new in today’s content.
Thank You All!!
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Learning how to use order was a challenge to me when I ventured into trading but I took time to understand how it worked and still trying to be proficient with it though. You did a good job delivering this lesson. Thanks for sharing.
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Initiating a stop-loss is vital when it comes to trading. You have done really well to explain what it means and how to apply it.
Thank you
Always a pleasure dear.