Placing a Limit Order: The most important instrument in crypto
Perhaps one of the most important instruments in the crypto market that you as an investor or trader should absolutely take into account is the so-called limit order.
The moment you choose to make use of such an order, it will be entered in the order book together with the stated maximum price or limit. How much the limit price is exactly is something you can determine yourself. An important difference between a limit order and a market order can be found in the fact that the latter is always processed immediately, while this is not the case with a limit order. The moment you have set a limit that will never be reached, it is even possible that your limit order will remain in the order book forever without actually being processed.
What exactly is a limit order?
As the name suggests, a limit order is a type of order in which a limit price is used. In concrete terms, this means that this order will not be processed immediately when it is placed, on the contrary.
The order will only be processed when the "limit" indicated by you has been reached. In practice, a limit order can work in two different ways.
Initially, it can be used to buy a certain cryptocurrency at a lower price, but it can also be used to sell a certain coin at a higher value than is currently the case.
All this happens completely automatically, so you don't necessarily have to sit behind your computer at the time in question.
Why use a limit order?
In particular, people who are new to crypto often choose to only use market orders. That seems obvious, but in practice it is absolutely not, on the contrary.
It may be the case that a market order is simpler (you simply indicate how much you want to invest and you immediately have a hold on your holdings), on the other hand it is much less attractive financially.
How come exactly?
Well, because in practice you are never guaranteed the best price by using a market order.
You have to be very lucky to be able to enter a cryptocurrency at a competitive price with an order like this.
With a limit order, this is much easier because you try to be one step ahead of the market, as it were.
Moreover, as stated earlier on this page, a limit order can work in two different ways.
In concrete terms, this means that you can, for example, set a limit order to a certain amount that is (far) above the value that you have paid for a certain cryptocurrency.
The moment this value is tapped, the sell order will be immediately implemented, allowing you to sell (part of) your holding at a very attractive price tag.
In the opposite case, a limit order is set for taking a certain position in a cryptocurrency at a price lower than the current market price.
Realize a lower entry with a limit order
The moment the price of a cryptocurrency is high, this of course means in practice that it is not immediately interesting to get into it.
It is then best to wait for the price to fall back to a level where you think that profit can be made quickly.
Does this mean you have to spend every minute of the day in front of your computer waiting for a dip in course? Of course not!
By setting a limit order, it is perfectly possible in practice to automatically take positions in one or more cryptocurrencies at a lower price than the current market price. Is the price of the cryptocurrency you wish to buy going through?
Then of course that means that you have seen your chance of taking a position (for now) go up in smoke.
How does placing a limit order work in practice?
Placing a limit order is actually very simple in practice. All you really have to do for this is select 'limit order' in the exchange you use.
The moment you have done this, you will be able to determine that various details need to be entered. This concerns the following:
- The price for which you wish to buy the cryptocurrency in question;
- The quantity you wish to purchase;
The moment you have determined and entered the above information, it is time to actually place your order.
As already indicated, this order will not be processed immediately. Instead, it is added to the order book.
You will see the order in the order book as “open” until the desired price has been reached.
At that moment it is automatically tapped and implemented after which the order will also be marked as “closed”.
You will also immediately be able to find the newly purchased cryptocurrencies in the balance at the exchange in question.
Conclusion; The importance of the limit order should not be underestimated
Despite the fact that by setting a market order you can in principle realize a nice added value without any problem, in practice it is always more interesting to use a limit order.
By means of a limit order it is therefore much easier to realize a nice profit (certainly in the shorter term).
Is there no disadvantage at all associated with this type of order?
Yes. It takes a lot more patience to take a position in a certain cryptocurrency than if you would just use a market order.
Can you live with that and would you like to be able to buy really cheaply and sell dearly with certainty? Then it is always more than worth it to choose to use a limit order.
