So, you want to start trading Bitcoin on an exchange? You think you know what you’re doing, but what the hell do all these new words mean?! Let’s dive in and learn more.
If you are just starting out in the world of trading financial instruments, the language and terminology can be a little bit confusing. There is nothing difficult about this so let me just explain some basics. The same terms apply to trading with a Bitcoin exchange, that do for traditional trading. There are many terms that are used in the financial world but I will start by explaining ones you will be seeing on our exchange on a daily basis.
special words or expressions used by a profession or group that are difficult for others to understand.
Basic trading terminology
Bid – Bid is the price that a trader or an investor agrees to buy a certain amount of assets, securities, currencies etc. If this price is accepted by the market maker or broker only then the transaction will happen. For example a bid on the market is $375 for 1 BTC which means a trader is willing to buy 1 BTC at the quoted price. If there’s a seller on the market that is willing to sell their 1 BTC for the same price then the transaction will be completed.
Ask – Ask is the opposite of bid. This means it is the price a buyer is willing to pay for an asset. Ask will always be higher than the bid. In number this would mean that someone is willing to sell their 1 BTC for $375 if there’s a seller that accepts this price, the transaction will happen
Spread – This is the difference between the ask and the bid price. This is how your broker or market maker makes money for the facilities for trading.
Market Order – This is an order that a trader makes through a broker or an exchange. The market order means they use a service to buy or sell the asset at the current best available price. This is the default Buy or Sell price you see on your exchange and it does not constrict you to any restrictions on the price or the timeframe when the order can be completed. A market order will always guarantee you the execution of the trade and is normally lower in commissions that other types of orders.
Limit order – This is an order that a trader also makes through a broker however the trade is not executed immediately as with a market order but it is executed when the price of the limit order is met. Limit order is normally set to a better price than the current. For example, a trader sets a limit order to sell 1BTC at $500. This trade will be executed when someone on the market agrees to buy at this price. A limit order can also let the trader or investor limit the length of time their order can be outstanding.
Market Depth – This is the asset’s stock’s, currency’s etc ability to take the execution of large market orders without having a large change in its price. So basically this is the amount of trades that need to be completed at the market price for its price to change. The market is considered “deep” when there’s enough volume of pending orders waiting to be executed both on the ask and bid sides. This will prevent a large order from affecting the price greatly. Market depth is joint with liquidity and volume. However having a high volume of trades doesn’t always necessarily mean that this asset will have a good market depth.
Liquidity – In simple words, liquidity means high volume of activity in a market. It shows the extent to which a currency, stock or an asset can be bought or sold quickly on the market without it affecting the price. This shows to which extent assets can be sold or bought with the prices remaining stable. Currencies traded on an exchange and used regularly are the most liquid assets compared to for example real estate or antiques.
Hope these definitions help make trading on a bitcoin exchange a bit simpler for you. You can also benefit from the trading tools on our platform. Although trading bitcoin (or anything else, for that matter) is a rather complex area, it can be perfected by learning the basics. Once you have enough knowledge, you’ll be on your way to success!
Any jargon you still don’t understand? Think we missed something? Want to know something specific about trading Bitcoin on our exchange? Let us know in the comments below!