What Is Spread In Crypto Trading?
Due to the unpredictability of the crypto market, newbies in crypto trading more often than not are locked in FOMOs and FUDs, revenge, and impulsive trading that can hurt their chances of making it big in the league. One significant thing that must be learned is the ability to read spreads, which many do not know or consider its significance. Educating oneself on how to manage the spread increases the chances of gaining from market volatility.
What is Spread?
A spread is the price difference between the buying and selling price of a coin or token. if, for example, the buying price is 1.00 and the selling price is 0.90, the spread is 0.10. if the selling price of bitcoin is 50120.4 and the buy price is 50179.1, the spread is 58.7, given 0.5% of bitcoin’s total value. If bitcoin moves more than 0.5% in the trader’s favor, the spread is beat and the trade becomes profitable.
Like with other financial markets, two prices are presented when opening a position in the crypto market. To open a long position means trading is at the buy price which is priced slightly over the market price. To open a short position means trading is at the sell price, a little below the current market price.
The Importance of Spread
Taking a bid-ask spread, a small spread means that the crypto asset is liquid in that there is a lot of buying and selling activity going on. A big spread can mean that there is a lack of liquidity in the crypto asset in question causing an imbalance due to few trading activities happening.
Another kind of spread is the measure of the difference between cryptocurrency exchange pairs like BTC/ETH. Indexing is implemented to accurately measure the spread in relation to their performance, scales, and bases. Two or more price series must be indexed by dividing each value in the series by the first occurrence usually starting with 100. This is used in general comparing two different instruments over the same duration or period of time. The chart will immediately show what asset is performing better than the other which can be very helpful and informative for a trader in making decisions. The spread is seen as the area between the indexed series showing how the two assets are moving with the market. If their course is close to one another, the spread is low and so is the deviation. If they are far from each other, the spread is bigger, and deviation is high. It is possible that they cross paths that indicate a trading signal wherein the buy price becomes the sell price, and the sell price becomes the buy price. This is called flipping.
Tips on Combatting the Spread
Think and plan carefully about each trade before placing them to prevent unnecessary losses as market uptrends are not guaranteed.
Try looking for the smallest spread as some markets are correlating with each other. A bitcoin surge may mean other altcoins can surge as well. Go for the cryptocurrency that is offering the smallest spread if only to take advantage of any rally.
New traders tend to close positions too soon. Spreads usually put trades in the red but if the trade is steady yet unprofitable, it can take a little while more before it turns in gains. Examine first the fundamentals of its unprofitability and chances of profit to judge your decision to either wait or close. If anything, a rapidly falling market that can incur losses appropriately calls out a trade to be closed.
Spreads speak volumes about the overall liquidity of certain exchanges and the liquidity of specific markets. Coming off from order book data, the spread is a vital data type for traders to base on in determining what asset to trade on. There are a lot of insightful gains when comparing the spreads of different exchanges or currency pairs whose market microstructures are not that easily readable on any trade data.
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