As a beginner day trader, there are many different terms that get thrown at you from the very beginning.
From the names of different indicators and studies, to patterns, price actions and just about everything in between, a lot can be overlooked. However, one thing that should be talked about more is the bid and ask spread.
I believe that the bid and ask spread is one of the most important references you can have when entering into a trade and knowing when to exit a trade.
What is the bid and ask spread exactly?
The basic definition of the bid and ask spread is the difference between the price that is quoted for an immediate sell of a security or an immediate buy.
Let’s break this down further.
The bid, for example, is the amount that someone is willing to pay for a security, and the ask is how much someone is willing to sell the security for.
To use an example, we will use a can of soda.
Let’s say someone walks up to you and offers to buy a can of soda from you for $1. However, you being the superior businessman, believes that the soda is worth $2, so you counter with this offer.
In this situation, the bid and ask spread is $1. In order for a transaction to happen, the bid would either increase or the ask would decrease.
If you were a stock broker and submitted a market buy for a can of soda at this point, you order could be filled anywhere between $1 and $2.
Why is it important when trading stocks?
The bid and ask spread is important because it allows you to see how fast or volatile a price movement is. Usually, when the bid and ask spread is large, there tends to be much more volatile movements.
Also it allows you to pinpoint what price you want to get your position filled at by using a limit order. If you are losing a market order with large bid and ask spreads then you are setting yourself up for failure because you are allowing the market to determine what price you will be filled at.
How do I use bid and ask when day trading?
I reference the bid and ask spreads in the TDAmeritrade Thinkorswim platform by utilizing the Level II indicator.
While it is not the only think that I reference, it helps me to get an idea of price volume and how many buyers or sellers there are at a particular time.
Thanks for reading!
p.s. if you like this article, then check out this one as well: