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EducationalSeptember 7, 2020

Crypto Derivatives Trading: Types of Orders

Shubham Goyal
Product Specialist
September 7, 2020

A derivative is an investment, the value of which is determined by an underlying index. Forwards, futures, options, and swaps are some common types of derivatives. When trading crypto derivatives, we need crypto derivatives exchanges to execute our orders. And orders come in a variety of types. Let’s dive into how they differ. But first, let’s refresh our understanding of derivatives.

Importance of Derivatives:

1. They help in reducing risk

The primary purpose of trading in derivatives is risk management. It helps in identifying the level of risk involved and working on reducing it.

2. Price discovery

A cryptocurrency’s price is influenced by various factors, such as its tech updates, market sentiment, regulations, etc. Cryptocurrency derivatives markets help in determining the price of the cryptocurrencies in the future.

3. Operational advantages – cost reduction

The operational costs, such as commissions in the derivatives market, are generally lower than if you were to trade in the spot market.

Orders

The term orders are used in financial markets by the investor to buy or sell the investments, which may be in any form such as securities, bonds, cryptocurrencies, etc. Crypto orders, in particular, exist to have some control over the way the crypto transactions are processed. Here’s an overview of the various types of , crypto orders when cryptocurrencies are involved.

Basic orders:

The most common type of crypto orders are as follows:

1. Market order

A market order is the simplest form of order that is placed to execute the purchase or sale of the cryptocurrency. Only the amount of cryptocurrency to be bought or sold is mentioned in these orders as the price it executes at will be the best price available in the market at the time. Market orders cannot be executed with conditions.

2. Limit orders

A limit order is an order where a cryptocurrency is either bought or sold when the market price reaches a specified value i.e., when a limit order to buy is executed, the cryptocurrency is bought at the limit or lower price, and when a limit order to sell is executed, the crypto is sold at the limit or higher price. Limit orders are executed only when the market reaches the said limit and not otherwise.

3. Stop orders

Stop orders are similar to limit orders, but become market orders once the pre-specified price, i.e. stop price, is reached. These types of orders – sell stop order/ buy stop order help protect profits and limit losses of the trader. The stop price of the sell stop order is lower than the market price, and the stop price of a buy stop order is above the market price.

Advanced Orders:

Some of the advanced crypto orders are as follows:

1. Immediate or cancel order

This is a type of order that will be executed only if the specified price and amount are available. Even if the assigned order is not able to be filled completely, it can partially be executed.

2. Fill or kill order

This is a type of order that can be executed only if the specified requirements are met with. There is no question of filling it partially. If it can’t be met with, it is completely canceled.

3. Good-till-canceled order

This is a type of order that stays put until it gets executed or canceled by the trader.

4. Good till date order

This is a type of order that stays put until it is executed or the day of expiration.

5. One cancels other order

This is a type of order where you get to place two orders. If either of these orders gets filled fully or partially, the other order will get automatically cancelled.

6. Hidden orders

This is a type of order that does not show up in the order books. This kind of order is placed when the trader does not want the market to know of his trading activities.

7. Iceberg order

This is a type of order which partially shows up in the order books. This kind of order is placed so that large volumes of transactions do not affect the market drastically.

8. Bracket orders

These types of crypto orders generally consist of three orders, namely the main order (buy/ sell order), which is bracketed by a take profit and stop loss order. When the main order is executed, one of the other two orders is also executed while canceling the remaining one.

How To Place An Order

Generally, cryptocurrencies are transacted in two ways. Either you directly deal with it in exchanges or directly with other entities. When you directly deal on cryptocurrency exchanges, you must keep track of the market prices, the other orders, and other data, i.e. you have to constantly keep an eye on the movements.

When you work with a broker, there is a contract, you can place orders as per your needs, and the buying and selling will be dealt with by the brokers.

Of course, there’s a lot more to cryptocurrency derivatives trading than just orders. One must understand margin, leverage, the concept of futures and options, and much more in order to succeed. Fortunately, the Delta blog has you covered.

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