Crypto Academy / Season 4 / Week 1 - Homework Post for @awesononso
Introduction
Bid-Ask price are important factors to consider in financial markets and it's effect may be felt on the market through the placing of trades irrespective of the market. Thus in a bull or bear market the bid-ask price would still continue to have it's same effect as it would on any market.
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A good bid-ask price could signify high liquidity on a market which means more traders are on the move which could also be a positive sign to draw even more traders on to that particular market since everyone wants the best price to trade in and a highly liquid market could mean less fees and more profit.
What is bid-ask Price
The Bid price basically looks at the price at which a commodity thus on the forex market, or currency or coin on the crypto market is been bought whereas whereas the ask price is that of the selling price. So an example will be that should steem be selling a price of $0.60 and buying for a price of $0.58, the initial would be the ask price with the later the bid price.
Do not get confused, for the commodity been bought by the buyer we look at the ask price, thus how much people are asking for to be paid for them to sell and the commodity been sold by the seller we look at the bid price thus how much people are asking for to buy what the seller is selling.
Importance of bid-ask Price
The Difference between the bid and ask prices constitute something we call spread or market spread whichever way you want to take it there are all the same the term applies to all markets including the forex financial market. On the crypto market you are likely to have the bid price in green and the ask price in red as show below.
The difference between the ask price and the bid price will determine something we call liquidity. When we talk about liquidity we are basically looking at how willing people are to buy or sell a particular commodity. More people been willing would mean that the selling and buying prices will be quite close, telling you that there are many traders in the market.
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A profitable market with high volume usually turns out to be highly liquid because there are always many buyers and sellers on the market. An example of that would be bitcoin for crypto and nas100 at the time of the new york session open on the stock market. Day traders take advantage of the liquidity to place trades and make profits since their orders will be at exactly where they want them or close.
And so the spread will directly inform of the liquidity of the market wider spread means low liquid and vice versa. Which would mean that placing a trade or order will probably take longer for it to be filled on a low liquid market and quite faster on a highly liquid market.
If Crypto X has a bid price of $5 and an ask price of $5.20;
Formula for calculating bid-ask spread or spread = ask price minus bid price
A. Spread will give us $5.20 - 5$ = $0.20
Formula for calculating bid-ask percentage = spread/ask price x 100.
B. Thus %spread will give us 0.20/5.20 x 100 = 19.23%
If Crypto Y has a bid price of $8.40 and an ask price of $8.80;
Formula for calculating bid-ask spread or spread = ask price minus bid price
A. Spread will give us $8.80 - $8.40 = $0.40
Formula for calculating bid-ask percentage = spread/ask price x 100.
B. Thus %spread will give us 0.40/8.80 x 100 = 4.54%
Of the Two Assets which have higher liquidity and why?
The asset with higher liquidity is Crypto Y this is because the spread is lower than that of X which directly or indirectly informs us that there are more traders on the Y market willing to buy and sell than X. Thus there is a higher chance of our order filling quickly.
Slippage, Positive and Negative slippage
Slippage occurs when on a highly volatile market, thus a market that moves a lot within short periods of time one ends up having their order been executed at a price other than what they initially opted for or price at which they placed their order.
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And so placing an order at 8$ and before it is executed price shoots to $8.5 or a different one. This is slippage. Slippage could be to the advantage or disadvantage or the buyer or seller, when it is advantageous we term it as positive and the vice versa. And so in the example i just gave, the trader if was selling would have made a profit of 0.5$ which makes is a positive slippage.
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On the other hand, if it was a buy trader then he would have paid higher than expected making it a negative slippage. Slippage doesn't only occur on the crypto markets but on all highly volatile markets.
Conclusion
Many thanks to professor @awesononso for such a great lessons. It was exciting reading and learning. Until next time, have a wonderful time.