Making Sense of Crypto Futures Order Types - What are they and when to use them?

Key Takeaways:

• Market orders can be used when traders need to immediately fulfill an order, especially when filling an order becomes more important than buying/selling at a specific price. However, market orders often result in higher fees and may, in some cases, lead to slippage. 

• Traders use limit orders if they wish to buy/sell at a specific price. A cluster of large limit orders (buy/sell) can help traders pinpoint potential support and resistance levels and determine the next market trend.

• Stop orders have two prices, a stop price and a limit/market price. The stop price converts an order to a buy or sell order, while the limit/market price sets the minimum, or maximum a trader is willing to buy or sell at, respectively.

Whether you’re just starting to make crypto futures trades or you’ve been a trading veteran for years, you ought to understand some of the key components of crypto futures for you to execute trades efficiently and minimize losses.

Crypto traders on Binance Futures can utilize tools such as market orders, limit orders, and stop orders, among others. Understanding these type of orders will help anyone have a better understading of trading futures.

What Are Market Orders?

The first type of order anyone should learn about when trading futures is a market order. Market orders are a form of order that should be reserved for pertinent situations. They allow traders to purchase or sell instantly and at the best available price. These orders require liquidity to be filled, and are executed based on the limit orders placed ahead of time.

Because market orders are executed immediately, the trader is subjected to taker fees. 

On Binance Futures, traders have the option to place market orders at market price in addition to limit and stop-limit orders. Market-buy orders will match to the least expensive limit-sell order on the available order book, so long as an order can be filled. 

If a buy order is placed for an amount that exceeds the cheapest limit-sell order, the remaining buy order will be filled at the next available limit-sell order found in the order book to facilitate the trade, which is known as slippage.

When to Use Market Orders?

Market orders can be used to traders’ advantage when filling an order becomes more important than buying/selling at a specific price. For example, when traders need to fulfill an order immediately, slippage is ignored and can help traders accomplish what they need. 

Another possibility that calls for a market order is if a stop-limit order is not fulfilled, and a trader needs to compensate by buying or selling immediately.

These orders should primarily be used in stringent circumstances when the downside of higher fees, slippage, and in other words, avoidable losses on a trade are less important than acting on the order itself.

Concerns With Market Orders

As alluded to above, placing market orders has some issues, and therefore should be avoided when first starting out in trading. Taker fees will be implemented on any market orders resulting in higher comissions that traders would have to pay. 

Also, when trading at high volumes, the limit-sell orders that a market order can take place at may not be fulfilled at a very low market price, and thus the slippage to a much higher price can cause the trader to lose a significant portion of their funds. 

What Are Limit Orders?

Limit orders are order types that traders should use to specify what price they would like an order to be placed. The trade will only occur if the market price meets limit price, allowing buy orders to get filled below the market price and sell orders to get filled beyond the market price.

Since the market price may never reach a set price of a limit order, these trades are not executed immediately and may never be executed. Furthermore, limit order fees are not as expensive as market order fees, and they regarded as maker fees.

When to Use Limit Orders?

Limit orders can be helpful in a handful of situations, including when speculating that the market will rise or fall sometime in the future. A cluster of large of buy or sell limit orders can help traders pinpoint potential support and resistance levels and determine the next market trend.

Looking at where these resistance lines are can benefit futures traders as they may help determine when and where to place a short or long order. Binance Futures also offers traders the ability to place limit orders at specified percentages of their balance.

Concerns With Limit Orders

A lack of volume can be a problem for limit orders and can prevent them from being executed. This happens when a limit order is placed into the books after several other limit orders are placed. Limit orders happen in chronological order, and so it is a first-come, first-serve basis. 

If enough limit orders have been fulfilled at a certain price, there still may be other limit orders on the books that didn’t get executed before the market price changed.

Also, if a limit order price is never met and thereby not executed, it will remain open, potentially harming the trading strategy you planned on implementing. Instead of potentially missing out on a window of opportunities with limit orders, there is a third option available to traders that allows them to set bounds on trades.

What Are Stop Orders?

Stop orders are orders that are triggered when a market moves past a specific price point. Stop orders are further categorized into stop-limit and stop-market orders. These orders have two prices, a stop price and a limit/market price. The stop price converts an order to a buy or sell order, while the limit/market price sets the minimum, or maximum a trader is willing to buy or sell at, respectively.

These stop orders are activated when the stop price is either met or surpassed, at which point the order is placed into the books with the limit/market price coming into play. 

For example, if a trader protected their account by placing a stop-limit order to sell their 1 ETH at $1,600, they could set the stop price somewhere around $1,650. If and when the price of 1 ETH fell to $1,650, the limit order would appear on the books, and should the price meet $1,600, the order would be sold.

When to Use Stop Orders?

Perhaps the most opportune time to use a stop order is to protect against major losses on a trade. In the crypto trading market, volatility is extremely high. Therefore, when unexpected market changes, swings, capitulations, and so on occur, it is crucial that futures traders are prepared for such a scenario. The best way to do so, and without revealing one’s hand, is through stop orders.

These orders can not only protect traders from furthering losses during moments of high volatility, but they can also assist traders in tracking crypto price ranges. Setting up stop orders can help decide when an exit strategy will be executed and take the stress out of traders’ emotions. If a trader sets a stop order at a price previously determined to be costly enough, the trader knows the amount of capital that can be lost ahead of time. 

Concluding Thought

Market orders, limit orders, and stop orders are a great trading tool when you want to buy or sell a coin at a certain price. You may use it to maximize unrealized gains or limit the potential for loss. But before choosing an order type, you should understand the different options and evaluate how each one plays into your overall portfolio and trading strategy.

Read the following helpful articles for more information about order types:

• (Support) Types of Orders Supported by Binance Futures

• (Blog) How to Place Stop Loss Order and Take Profit Order

• (Blog) Trade Crypto Futures: How Much Does it Cost?

• And many more Binance Futures FAQ topics...

Disclaimer: Crypto assets are volatile products with a high risk of losing money quickly. Prices can fluctuate significantly on any given day. Due to these price fluctuations, your holdings may significantly increase or decrease in value at any given moment, which can result in a loss of all the capital you have invested in a transaction.

Therefore, you should not trade or invest money you cannot afford to lose. It is crucial that you fully understand the risks involved before deciding to trade with us in light of your financial resources, level of experience, and risk appetite. If required, you should seek advice from an independent financial advisor. The actual returns and losses experienced by you will vary depending on many factors, including, but not limited to, market behavior, market movement, and your trade size. Past performance is not a guide to future performance. The value of your investments may go up or down. Learn more here.