Understanding Bid and Ask: A Guide to Buying and Selling Pressure

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Updated: 10 September 2020

Bid and ask to indicate the buying and selling prices of a security and essentially dictate the market. As a trader looking to buy a security, you will be required to pay the ask amount. Alternatively, if you are looking to sell, you will place an order at the bid price. As with many other types of sales, you can request to buy the security at the retail price should you feel the asking price is too high. This possibility of bartering creates opportunities and is done throughout the market constantly. Here are some trading tips for the functions of bid and ask.

Order types

Various order types are used within the trading industry. When you place an order, your broker will locate the best available prices. This order type, known as a market order, allows you to sell at market price and automatically fill the bid price. If you want to buy through a market order, your order will be filled at the asking price.

The next order type is called a limit order. Placing a limit order means setting a maximum price at which you are willing to complete your trade. This allows you to keep tight margins.

Understanding spreads

The difference between the bid and ask prices is known as a spread. This is an essential aspect in trading as it reflects the ever-changing value of a stock or security. The larger the difference between these two amounts is, the larger the risk of losing profits. Because day traders trade in short spaces of time, this spread size affects their trades immensely when exiting a position. This is where limit orders become especially beneficial as larger spreads can be riskier.

Trading low volumes with wide spreads

Trading a stock at low volumes when the spreads are larger is not advisable because rapid price movements can occur and trap you in a position. Don’t fall prey to this; it is better to stick to higher volumes of stocks with tighter spreads.

Zoning in

After you learn how to trade CFDs or any other market, you will notice the effects of the trading procedures. Sitting in front of a computer screen and staring at numbers all day not only takes its toll on you, but it might also tempt you to make spontaneous or impatient decisions. To avoid these mistakes, you should focus on the highs and lows of the trading day, major support and resistance levels, and the areas surrounding your stop positions and profit targets. These factors help you recognize the likely movement of a price and its potential to break the trend.

Algorithms

Algorithms replaced the act of monitoring changing bid and ask prices and making decisions based on a possible break. These advanced algorithms run millions of orders at a time, which are cancelled before a trade even occurs. This is ultimately to ensure that other traders are speculating against the trend, and it puts you at a disadvantage. When you have doubts about algorithm functions, you can still confirm pricing by analyzing the sales.

The order flow, or speed, is an essential factor in this method. A lower stock price can be predicted when the order flow is a bid and marked with red. If orders come in at ask and are marked with green, it will indicate higher bidding on the stock. When monitoring bid and ask prices, it is still important to pay attention to the time and number of sales to monitor where other traders are focusing their trades.

The aim of understanding bid and ask is to ensure you do not lose money when buying and selling stocks. This will also allow you to learn the trading patterns of the security before you decide to invest and can guide your future strategies.

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