A Look at Available Limit Order Mechanisms to Increase Profitability

A Look at Available Limit Order Mechanisms to Increase Profitability

By kev_nag | kev_nag | 24 Nov 2021


***INTRODUCTION - WHAT IS A LIMIT ORDER?***

A limit order is a type of order to purchase or sell a security at a specified price or better. For buy limit orders, the order will be executed only at the limit price or a lower one, while for sell limit orders, the order will be executed only at the limit price or a higher one. This stipulation allows traders to better control the prices they trade.

[Kramer, M. [Limit Order. https://www.investopedia.com/terms/l/limitorder.asp. (Accessed November 13, 2021)].

The difference between a market order and a limit order is simple, A market order is executed at the last price immediately whereas a limit order is executed if and/or when a predetermined price is reached.

A market order is the straightforward alternative for investing for beginners and as the default style of order on all AMM DEXs. The limit order, however, is intended for experienced traders as they require analysis of the market to determine the probability of an asset reaching a specific price. Knowledgeable use of limit orders can significantly increase the potential profitability of a trade.

Limit orders exist on both the buy side and sell side of the spectrum. A sell limit order will only be completed at the predetermined price chosen or higher and a buy limit order will only be completed at the predetermined price chosen or lower. Therefore, it can be readily be seen that use of limit orders permit an investor to better control the price for the market action they desire.

Many CEXs and DEXs now offer limit order functionality bringing new advanced features to decentralized finance. To that end, in this article we will give a look into the basics of request for quotes and conditional execution and dynamic pricing.

***REQUEST FOR QUOTES***

A request for quotes (RFQ) is a mechanism to provide better pricing for large or medium size trades by permitting market makers to bridge liquidity from centralized exchange users to decentralized exchange users. It is the aim of this system to allow the provision of larger amounts of liquidity to the decentralized exchange simpler, more profitable and at lower risk as the applicable market makers would have the choice of who to deal with and when. By this, the market makers can maximize the ratio of retail order flow to arbitrage flow applicable to them.

This RFQ mechanism encourages primary market makers, who usually trade cryptocurrency on centralized exchanges, to trade large amounts of cryptocurrency at low risk on decentralized exchanges. Let's assume an investor wants to swap 250 Bitcoin. The limit order platform uses an RFQ to reach out to the primary market makers inquiring if they will perform the swap. If a PMM is then interested a signed order is sent.

Once executed, the PMM then sells the 250 Bitcoin on a different chains decentralized exchange at profit. The result is that the primary market maker has moved the liquidity from the centralized exchange to the decentralized chain. By using the RFQ, the investor has the large order executed at a predetermined price, the primary market maker profits, and the decentralized exchange uses to its advantage the new liquidity brought by the primary market maker.

***CONDITIONAL EXECUTION AND DYNAMIC PRICING***

With thanks to 1inch, conditional execution and dynamic pricing are now available providing new functionalities for investors. With conditional execution, investors may now specify conditions upon which their orders will execute permitting a maximization of trade earnings.

With dynamic pricing, swap pricing is accomplished by smart contracts taking into account supply and demand for the asset in question. Two promising areas for use of dynamic pricing are: dutch auctions (as the limit order may be fashioned so that the price will increase or decrease); and, in powering IDOs based on an auction model.

STOP ORDERS AND STOP LIMIT ORDERS

The stop order is placed only upon the occurrence when specific price conditions are met, where the data for price is obtained from oracles. For example, an investors order would take the style like: sell Ethereum at $3,800. when the oracle price is below $4,000. The stop order may be used in conjunction with both limit and market orders affording investors additional flexibility and mechanisms to enable more complex trading strategies.

Limit orders and stop orders are not identical mechanisms. The stop order is only placed on the occurrence of reaching the predetermined price set by the investor. On the other hand, a limit order is placed on the order book and is available for everyone to see at once.

And finally for this article is the trailing stop loss order. This order specifies the stop loss at a pre-set percentage lower than the subject asset's market price. It does not set a specific single price to execute the trade. After setting the percentage, the stop loss trails behind the subject asset's price as that price changes.

***CONCLUSION***

As technological innovation drives the expansion and development of decentralized exchanges, the tools available for investors to utilize must become more specialized and sophisticated. We must not lose sight of the ultimate goal of investing which is the maximization of returns. While this article has provided insight into several of the tools available now to cryptocurrency investors, continued innovation in this arena will lead to even more new tools becoming available to investors to foster this ultimate goal.

AUTHOR'S NOTE: This article was previously published on Leo Finance and several other tribes on the HIVE Blockchain.

 

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kev_nag
kev_nag

Just an ordinary casual crypto investor.


kev_nag
kev_nag

Retired, finally. I enjoy learning about crypto and sharing my discoveries. Also, I follow the News closely and enjoy discussing current events. I have no political agenda, but advance views based in reality with a slant toward real world consequences.

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