Bid-ask spread and slippage: impact on trading and practical application

What is the bid-ask spread?

The bid-ask spread is the difference between the lowest ask price ( and the highest bid price ). Essentially, it is the gap between the price at which sellers are willing to sell an asset and the price that buyers are willing to pay for it.

Bid (bid) is the maximum price that buyers are willing to pay for an asset. Ask (ask) is the minimum price at which sellers are willing to sell their assets.

Factors Affecting the Bid-Ask Spread

The size of the spread directly depends on several key factors:

• Market Liquidity — assets with high liquidity typically have a narrow spread. Popular trading pairs on major platforms tend to offer minimal spreads due to high trading volumes.

• Volatility — during periods of high volatility, spreads often widen as market makers increase their protection against sharp price movements.

• Trading hours — during peak activity, spreads narrow, while during periods of low activity, they widen.

Slippage and its relation to the spread

Slippage ( occurs when a trader receives a different execution price for an order than expected. This often happens when trading large volumes or in markets with low liquidity.

Slippage can occur:

• Positive — when the execution occurs at a better price than expected
• Negative — when the execution price is worse than expected

Practical Application of Knowledge about Spreads

) Strategies for Different Market Conditions

During periods of high volatility:

• Use limit orders instead of market orders to control the execution price.
• Consider the potential spread widening when planning to enter and exit a position.

In low liquidity:

• Split large orders into several smaller ones to minimize market impact
• Set more conservative stop-losses considering potential slippage.

( Trading optimization on platforms

When choosing a trading platform, pay attention to:

• The depth of the order book for assessing liquidity
• The average spread size for the trading pairs of interest
• Commissions and their impact on overall trading costs

Market Liquidity Indicators

The bid-ask spread is one of the key indicators of market liquidity. A narrow spread usually indicates high liquidity and low trading costs, while a wide spread signals potential liquidity issues.

Experienced traders regularly analyze the dynamics of spreads to determine the optimal time for trading and select the most liquid markets, which helps to minimize costs and improve trading results.