How to trade: order books and market orders

Trading or investing in cryptocurrencies involves greater risks than traditional assets. We invite you to read more about our risk policy.

This series of blogs will help you become familiar with Bitso Alpha and teach you how to trade. If you are interested in starting crypto mine trading but don’t know where to start, you are in the right place.

At this point, we are already familiar with the different Markets available, as well as their Order Books and how to buy and sell cryptocurrencies on Bitso Alpha using Market Orders. Let’s start by reviewing how commissions work in Bitso.

Bitso Commission Model: Maker and Taker Commissions

You can find details about the commission model and the percentages for each market on Bitso’s official website. The applicable commission percentage depends on the volume each user has traded in the last 30 days. For our example, we will use the base commission percentage: Maker commission of 0.5% and Taker commission of 0.65% for the MXN/BTC market.

The term “Maker” refers to traders who provide liquidity on either side of the book, either buy or sell orders. They “make” the market by creating orders that compromise their funds. “Takers, on the other hand, “take” liquidity from books by filling existing orders.

To illustrate, let’s review how commissions would apply for a market order to buy 0.5 BTC, which was completed with 3 orders of the sell positions that are seen in the image:

In our scenario, the market buy order for 0.5 BTC is the “Taker”, while the 3 sell orders with which it is executed are the “Maker”. For each trade, there is a “Maker” and a “Taker”. The general rule is: if your order is filled with an existing order, your order is the “Taker”. Returning to our example, the buy order pays a commission of 0.65%, as it is “taking” liquidity from the sell orders. That commission is automatically subtracted from the resulting 0.5 BTC, and what is actually added to our portfolio is 0.49675 BTC. In this case, the sales orders pay 0.5% for their part, and in this case it applies to the resulting MXN.

Limit Orders

Market orders are the perfect tool when looking for the transaction to be executed immediately, as they provide immediate liquidity. They do not give us control over the price, but they execute the order the moment Bitso receives it. However, if you are looking for better control over the prices at which you want to buy or sell, you can use Limit Orders.

We will use the following BTC/MXN order book to help us with the examples:

In this type of order, in addition to the amount of BTC to buy, you have to specify the price you are willing to pay for it. In our original order book, we have the best buy offer paying $199,500 MXN, and the best sell offer asking for a price of $200,500 MXN. We can request the price we want, but for our example, let’s put the limited order at a price of $200,000 MXN, this way, we will be bidding exactly at half the spread.

This is how you generate a limited order in Bitso Alpha:

Once we send our limit order, as there are no sales orders willing to buy at $200,000 MXN, our order will be accommodated at the top of the purchase orders:

With the creation of this order, we have increased the BTC purchase price from $199,500 MXN to $200,000 MXN. This order has added liquidity to the purchase order book.

This is where you can see your pending limit orders on Bitso Alpha:

At this point, four things can happen:

  • First: Being at the top, it can be completed, either totally or partially, by the following market orders submitted by other traders.
  • Second: It can be pushed down the book by new limit orders offering better prices, for example, if someone offers $200,000.01 MXN. Even if it’s for 1 cent more, that new order would be placed on top of ours.
  • Third: Let’s say the BTC price quickly rises to $220,000 MXN. This will not affect our limit order: if the price returns to $200,000 MXN and has not been cancelled, it will be executed.
  • Fourth: It can be cancelled by the user. These orders do not expire, unless explicitly requested, this is called “Good until cancelled”, and is an option when creating the limit order.

When a limit order is created, the purchase amount is “committed” to the order, and is subtracted from the available portfolio amount. These orders can be cancelled at any time just by using the close button. This returns the amount previously committed to your portfolio.

Speaking of commissions for limit orders, these orders are the ones that normally give liquidity to a book, therefore they are the ones that usually are the “Maker” in the transactions and pay the lowest commissions.

These are the two types of basic orders, however, Bitso offers two other types of conditioned orders.

Stop-Loss Orders

In essence, these are conditioned market orders. This is how they are generated:

Let’s say BTC is currently trading at $200,000 MXN. However, a period of volatility is expected soon and you think the BTC price may fall. You want to protect your position by selling your BTC once the price reaches $195.00 MXN. To do this, you must place a Stop-Limit order with a Stop price of $195,000 MXN.

As soon as the price reaches $195,000 MXN, Bitso automatically generates an order and it is executed as a regular market order.

This may not happen, but if it does, you will be protected if the price falls below your stop. Unless you are a HODLer, in which case: buy more!

Stop-Limit Orders

Similarly, Stop-Limit orders are conditioned limit orders, which are generated once the price reaches the defined Stop. This is how they are generated:

In this scenario, once the BTC price reaches $195,000 MXN, a limit order is generated at a price of $195,500 MXN, and executed as a normal limit order. Stop-Limit orders are useful if you are looking for better control of the price at which you sell in case the stop price is reached, but keep in mind that the resulting limit order may not be filled in case of an abrupt price drop. These types of orders are a risk control tool widely used in combination with technical analysis, a subject that we will cover in the future.

This covers the basic concepts about orders. You are now ready to start applying this learning to your trades. In our next blog we will talk about charts and candles, don’t miss it.

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