Lesson 1: Order Types - Limit Orders (bid, ask)

On financial markets, including the crypto market, the interaction between buyers and sellers determines supply and demand, which shapes asset prices. High demand with limited supply pushes prices up, while excess supply with low demand pushes them down.

There are two main types of orders: market and limit.
We will cover market orders in the next lesson; for now, let's focus on limit orders.

A limit order is an instruction to buy or sell an asset at a preset price. This type of order lets traders control the price at which they are willing to make a trade (a buy or a sell, which is especially useful in a volatile market.

Key features of limit orders:

Price guarantee: A limit order is executed only at the specified price, which helps the trader avoid unexpected losses from sharp price swings.

Execution: Limit orders may not be filled if the market never reaches the specified price. This can be either an advantage or a drawback depending on the situation.

Strategy: Traders use limit orders to hit their entry and exit targets, which helps them manage risk and profit more effectively.

Types of limit orders.

Bid (a limit order to buy)

• Definition: The bid is the price at which a trader is ready to buy an asset. It is a limit order to buy that can only be placed below the current market price. If the asset's price reaches the bid level, the order will be filled.

• Function: Bid orders show the level of limit demand for an asset. The larger the bids, the more interest there is in buying the asset, which can help both stop a decline and support further growth.

Ask (a limit order to sell)

• Definition: The ask is the price at which a trader is ready to sell an asset. It is a limit order to sell that can only be placed above the current market price. If the asset's price reaches the ask level, the order will be filled.

• Function: Ask orders show the level of limit supply for an asset. The larger the asks, the more limit supply there is on the market, which can lead both to a halt in growth and to a subsequent decline.

The difference between bid and ask

• Spread: The difference between the bid and ask prices is called the spread. It represents the cost of a trade and indicates the asset's liquidity. A narrow spread can point to high liquidity, while a wide spread can point to low liquidity.

• Market: When traders use market orders, they effectively accept the current ask price to buy and the current bid price to sell, which illustrates the interaction between supply and demand.

So bid and ask are the core components of market structure, letting traders set the price levels they want for buying and selling assets.

Let's check how well you've learned the material from this lesson. Answer the questions to test your knowledge and move on to the next lesson.