The main concepts in trading

After getting acquainted with the key features and principles of crypto trading, it’s time to familiarize yourself with the terminology.

Among the main terms of crypto trading: currency pair; bid, ask and spread; exchange glass; long and short positions; orders, as well as their main types, etc.

What is a currency pair?

A currency pair is the ratio of two currencies, which shows how many monetary units of one currency are worth a unit of another currency.

For example, in the ETH/BTC pair, you buy the Ethereum cryptocurrency, paying for it with bitcoin. The first currency in a pair is called the base currency, and the second is called the quote currency. Thus, a currency pair shows how much of the quote currency is needed to buy one unit of the base currency.

Bid, ask and spread

Bid is the price that the buyer of an asset is willing to pay. Ask is the price at which the seller is willing to sell the asset. Spread – The difference between the ask and bid prices.

In simple words, in any market, the buyer names the price at which he is ready to buy something (bid), and the seller at which he is ready to sell something (ask). This is similar to the situation in the usual grocery market, when some haggler calls a lower price, and the seller defends a higher one. At the same time, both seek to maximize their profit.

During the auction, the seller may lower the price slightly. Under the onslaught of the seller, the buyer may retreat somewhat and agree to buy with a discount that is not so big, but still. In the process of trading, the bid and ask gradually approach the point of contact – the equilibrium price. The spread is narrowing. When the seller and the buyer agree on the price to be paid and the price at which the commodity must be sold, the transaction is made (i.e., the bid becomes equal to the ask).

The processes taking place on the crypto exchange are fundamentally no different from those described above, in a typical “bazaar” scheme. In most cases, the seller does not want to part with assets at the current, not the most favorable price for him, and prefers limit orders that are not executed immediately.

A trader who wants to buy a cryptocurrency usually does not seek to do so at the current market price. He sets the bid price that is interesting for him, and the selling trader sets the ask price. In fact, there is a normal bargaining.

For example, if the current market price of a coin is $1, then it is likely that the ask price will reach $1.02 and the bid price will be $0.98 (or even less, depending on the liquidity of the coin).

Spreads are usually small on large venues where large volumes of crypto assets are rotated daily. Much also depends on the liquidity of the digital currency itself. For example, on a large platform, the spread of the Ethereum cryptocurrency will most likely be narrower than that of some YOYOW or Eidoo.

Exchange glass

This concept is called the digital display of current buy and sell orders set by traders. The order book has the form of a table, where orders for the purchase and sale of an asset are displayed in real time.

To make an exchange transaction, a trader places an order indicating the parameters of a future transaction: buying or selling, the required volume of the asset and the desired price. The transaction is executed when the exchange system detects a counter order that fully satisfies the requirements specified in the order.

If there is no corresponding counter order for some time, the order is entered into the “order book”. Displayed in the order book, the order begins to wait for a counter order.