Market order, limit order and stop order: what they are and how they work
March 28, 2023
5 min
Theoretically, there are 3 types of orders in trading: market orders, limit orders and stop orders. In practice, they translate into buy limit and buy stop orders to open a position in the market, and stop loss and take profit to close it and liquidate the position. Let’s see how these three orders work with concrete examples.
Advanced orders in trading
Beyond simply buying and selling “at market”, more advanced trading tools let you set more sophisticated orders — limit orders and stop orders — and rely on technical analysis on price charts and on consulting the order book. But let’s start with the classic market order.
Market orders
Unlike limit orders and stop orders, the market order is executed immediately after being opened. The market order fetches from the order book the first available sale price (Best ASK) to complete a buy order; conversely, it fetches the first available buy order (Best BID) to complete a sell order.
Here are two examples on the SOL/EUR pair:
- Let’s say I want to buy 10€ of Solana (SOL). My market order will complete the sell orders, starting with the cheapest, i.e. the Best ASK (A) — remember that these asks are nothing more than limit orders waiting to be matched. If the desired quantity matches that of the Best ASK, the ask is removed from the order book and I get 1 SOL.
- Let’s say I want to buy 100€ of SOL: the Best ASK is not enough. The order completes A, B, C and part of D until the 100€ are used up (100€ = A 10€ + B 15€ + C 60€ + D 15€), taking 15€ of the 33€ at level D and leaving 18€ in the order book. Orders executed after mine will start from what remains of D; A, B, C and part of D are filed in the Trade History.
The same mechanism, in reverse, applies to selling, which draws from the first buy order (Best BID) going down to lower prices.
Limit orders
Limit orders allow you to set a price in advance at which you want to buy or sell, and have the trade execute itself if that price is actually reached by the market. When setting one, you choose whether to buy or sell, enter the execution price (limit price) and the quantity. To buy, the limit price should be set lower than the current one; to sell, higher than the current one.
Limit orders often also come with advanced options, i.e. execution conditions that let you manage your order better:
- Good ‘Til Canceled (GTC): your order remains active until it is either executed or cancelled. This is the standard option for limit orders.
- Day Only: your order only stays active until 00:00 UTC.
- Fill or Kill (FOK): the order must be executed in full, otherwise it is not executed at all.
- Immediate or Cancel (IOC): the order is executed immediately at the desired price; if there is not enough quantity at that price, it is only partially executed. This is the difference from a market order.
Stop orders
Stop orders, like limit orders, allow the execution price to be set, but the main difference is that they trigger a market order the moment the stop price is reached: the trade is therefore made at the first available price right after. Sell stop orders (stop loss) are mainly used to avoid large losses, while buy stop orders (buy stop) are used to avoid missing an opportunity if resistance lines are broken. The stop price must be higher than the current price when buying, and lower when selling.
There are two types of stop orders:
- Stop Market Order: triggers a market order when the stop price is reached (standard setting).
- Stop Limit Order: lets you set two prices, the stop price and the limit price. The stop price is what the crypto-asset must reach for the order to trigger; the limit price indicates how much you are willing to pay when buying or the minimum you will accept when selling. The order is executed in the range between the stop price and the limit price.
When buying you only operate at prices higher than the market price, so the limit price must always be slightly higher than the stop price. When selling, conversely, only at lower prices: the limit price should be set below the stop price, as it indicates the minimum price at which you are willing to sell to protect yourself from further losses.
Example of a stop-limit purchase, aiming to buy after a resistance assumed at €11,060.00 is broken: market price €10,901.6; stop price €11,060.90; limit price €11,062.20. The execution price, if reached, will be the cheapest available between €11,060.90 and €11,062.20. If that range is no longer available (e.g. a very large order exhausts it first), the stop limit is cancelled.
In short, there are 3 trading modes, of which limit orders and stop orders also provide advanced options to set the conditions that best suit your trading strategy.
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