The spread in crypto trading is the range between the price at which coins are sold and the price at which they are bought. As a rule, these are two different prices, since buyers want to buy at a lower price, and sellers want to sell as expensive as possible - this is the spread.
If you are going to seriously engage in crypto trading, then we strongly recommend that you thoroughly study this topic. In particular, it is on spreads that honest brokers make money. And since each brokerage firm has its own tariffs, the earnings are also different.
Some brokers make money exclusively on spreads as they can be quite large. The minimum spreads are set by market makers. As you move towards the end trader, the spread increases. And in accordance with it, the earnings of dealing centers and brokers' commissions increase.
The essence of the spread in crypto trading
Consider the following simple example. Let's say you want to buy bitcoins from someone. When negotiating a purchase, you can say that you are willing to pay $ 10,000 for one bitcoin. This is the ask price. But the seller believes that bitcoin is more expensive and he refuses to sell it for less, for example, for $ 12,000. This is a seller's price offer.
The difference between the bid price of $ 10,000 and the bid price of $ 12,000 is $ 2,000 - this is the spread. The higher the spread value, the higher the market liquidity.
Spread size = cost of the exchange transaction. Remember that traders do not buy and sell on the exchange, but brokers. Although the reality is that their presence in the work on the exchange is imperceptible.
The size of the spread depends on the following factors:
- liquidity;
- the number of trades for a specific cryptocurrency pair (supply and demand);
- general market situation.
How to take into account the market spread?
Now that you have a better understanding of the concept of the market spread, you should know how it is calculated and how to take it into account when placing orders. It is especially important to consider the spread for scalping traders.
And at the same time, for those who trade/invest in the medium or long term, as well as for those who set large stop losses and take profit, the spread does not really matter.
How to reduce spread costs:
- use limit orders;
- calculate the size of your order taking into account the existing counter orders;
- trade around tight spreads, i.e. in liquid markets
A limit order is a tool with which you get the opportunity to buy a cryptocurrency that you will need in the future at a price lower than its current price on the market.
The risk to reward ratio measures the difference between the trade entry point before the stop loss and a sell or take profit order.
Take profit is the automatic closing of a position when the minimum or maximum price is reached. A prudently set take profit will help you to automatically fix the profit on a position, and also save your time.
The profit target is used to chart an exit point in advance in case the trade moves in a favorable direction.
The potential profit on a trade is the difference between the target profit and the entry price.
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