02/09/2023

What are BID, ASK and SPREAD in trading?

trading

Finding truthful information about the market and its processes is extremely difficult. People are used to googling to find something useful and informative. And yes, if you search for "spread is", you still have a chance of getting an objective explanation of the term. But if you search for "market mechanics", you might be horrified. The first few lines of search results will be taken up by articles stating that "the main types of market mechanics are: trend, correction, reversal, level breakout and rebound…". By filling his head with such knowledge, a trader risks not only losing his common sense, but also his deposit. That is why we try to spread as much objective information about the market as possible.

In our opinion, talking about the mechanics of the market in terms of “reversals and breakouts” is like talking about the mechanics of an internal combustion engine, but not about the processes that take place in it, such as fuel injection, combustion, movement of the pistons under the action of the gases produced, but simply saying "the car is going and it is turning left".

Trends, corrections, and reversals are a consequence of what has happened in the market. Or as Aires said in the second level of course - "the shadow of a friend".

The real mechanics of the market are:

● how orders are matched
● how buyers or sellers shift the market equilibrium and cause price movements
● How liquidity flows from one hand to another, from one set of assets to another.

The basics first

How does the process of buying or selling an asset on an exchange work?

For example, you have $10.000 in your wallet and you decide to buy Bitcoin. How to buy it here and now? Quite simply! On the exchange terminal, there is a button labeled "Buy", you press it and in a fraction of a second, the number of Bitcoins you have enough money for appears in your wallet.

how-market-works

A seemingly unremarkable activity. You do it every day of your life and you don’t even think about it: you buy a coffee from the coffee shop near work or groceries from the shop near your home. But then something goes wrong and your favorite drink isn’t there. You’re willing to pay a double price just to get that cup of coffee you want, but it’s impossible because it’s just not there.

The same goes for buying Bitcoin. For you to be able to buy Bitcoin so easily, someone has to want to sell it. But that someone may not be as hasty as you, they may have an objective to sell the asset for more than the current price, so they put their lot in the order book. By the way, you could also buy Bitcoin cheaper.

BID ASK, what is it?

In many of the articles on this blog, you’ll come across references to the most basic concepts, because you can’t do without them. For example, there are two sides to the market – buyers and sellers. They can manifest themselves in two ways:

  1. Actively
  2. Passively.

Being active means that you press the “Buy” or “Sell” buttons on the trading terminal and make an immediate trade, in other words, you trade the market.

A passive manifestation is a pending trade when your lot is placed in the order book. This is where we come across the BID, ASK, Spread terms.

There are two types of orders in the market: to sell and to buy, i.e. Bids vs Asks. Let’s go into detail. Defining Asks, these are sell orders, placed at the top of the order book and marked in red. The definition of BID is – buy orders placed at the bottom of the book, they are green.

bid-ask-explanation

What is a Spread?

What are spreads in trading and why should you know about them? There is a separate type of trading – trading spread, but this is a more complicated subject and we will talk about it in future articles. For now, we will just cover the basic terms.

The Spread exchange is the difference in bid ask price between two different similar commodities traded on open markets.

Put simply, Spread is the difference between the “best” buy price (Bid) and the “best” sell price (Ask). We put the word “best” in quotes because it is the best price at any given time, but in reality it is just the closest price to the market.

The Spread can be narrow when the difference between the BID and ASK prices is minimal. As the difference between them increases, the Spread widens. Correspondingly, the Spread is wide when the difference between the Ask and Bid price is significant. Such a difference exists because buyers want to buy the asset as cheaply as possible and sell it at a higher price. On the Resonance platform, the Spread can be seen in the Depth Density tool.

Conclusions

If you urgently need to sell a Bitcoin and press the “Sell” button, the exchange’s mechanisms will match it with the next bid on the BID side. And vice versa. If you urgently need to buy it, your dollars will go to the order book and look for a better bid on the ASK side.

It is a common situation where you have already bought what you want and have decided to sell at a higher price, but you do not have much time to sit in front of your computer waiting for the price to improve. In this case, you enter the Ask, i.e. you place your sell order in the order book on the ASK side and humbly wait for someone to want to buy from you.

These are the simple, straightforward, and true market mechanisms: buys are executed against sell orders and sales are executed against buy orders.

These basic principles of pricing have left their mark on history. And it is on the basis of these processes that the trader continues to study what is happening in the market, to analyze, to gather all the arguments, and to profit from them.

Topic:#Trading
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