Understanding spreads in Trading
One of my first jobs in finance was at a trading desk as a glorified assistant, besides a myriad of odd jobs I sometimes had to prepare charts for the chief trader, on one such occasion he asked me to chart a couple of price series and told me that the spread had flipped, obviously some sort of trading signal. I nodded enthusiastically but really had little idea what precisely that meant.
So today I’d like to talk about spreads as they relate to trading and cryptocurrencies.
Even though cryptocurrencies are a new asset class, they share a lot in common with both equities and forex, so things are somehow interchangeable across assets.What’s a spread ?
In general a spread is the difference in between 2 data points, which data points and what this difference means depends on the context, let’s start with a trading spread or bid-ask spread…
Your average trading exchange has both Bid (buy Side) and Ask (Sell side ) quotes, the difference in between these 2 makes the spread:
