Can We Take Your Order?
• 8 min
• 8 min
Welcome back to some more Weekly BS, today’s host: trading part-two.
Making an Actual Trade
Once you’ve done your market research, you may be ready to put your money where your mouth is and make a trade! But, just as there’s more depth to market data than level 1, there is more to making a trade than clicking buy.
Every trade involves a different order type and, while this may be hard to believe, there are actually hundreds of order types supported by the markets! There are stop orders, hidden orders, reserve orders (sometimes called iceberg orders), basket orders, pair orders, discretionary orders, and even algorithmic and automated orders. While we don’t have the space or time to get into all the different order types, the point is that learning and using them can help you be a more knowledgeable and seasoned investor. Most importantly, you should use a platform that has a variety of order types.
Limit orders allow you to set your limit price for an order. So... if you want to buy stock or blockchain securities you can set the maximum price you’d be willing to pay. This works the same for sell orders except you would set a minimum selling price.
There are many reasons for choosing to send a limit order instead of a typical market order which is just an executed order at the best market price at that time. For example, if the price of a security is moving very quickly, or if there is a big difference between the best bid and the best ask (that’s called “the spread”) a limit order can be used to make sure you don’t get a bad price.
Limit orders allow you to be cautious and generally lower your risk. However, limit orders introduce the risk of simply not making a trade because no one in the market is willing to sell or buy at your limit order price (this is called “no liquidity”).
Ok - so now you have a limit order sitting in the market (aka the “order book”)...what's next?
Order Matching Engine
The market has an order matching engine or system that determines what happens to every order in the market/order book - which is arranged by price then time priority. For instance, if you enter a buy limit order with the highest price in the order book, before anyone, your order will take priority. To complete the transaction, you need a sell order, whether limit, market or otherwise, to “match” with your limit order price. Voila, now you have a position, meaning you own the securities.
Traders and investors rely on a blotter to see real time information related to: securities they own (their portfolio), limit orders pending in the market, their completed trades, and if there are canceled or rejected orders. The blotter also provides important details such as average price, limit price, amount, time/date, and side (buy or sell). Easy access to the trade blotter is critical because how else can you remember all this information while trading? The blotter is just a tool to make your life easier and more efficient.
This adventure is complete...please exit to your right!