Choosing Between BID, ASK, and LAST Prices in Trading
When creating a trade in 3Commas, understanding BID, ASK, and LAST prices is essential for optimizing your strategy. These options define how your orders interact with the market, and choosing the right one depends on your goals and risk tolerance.
Understanding BID, ASK, and LAST Prices
BID: The highest price a buyer is willing to pay for an asset.
ASK: The lowest price a seller is willing to accept.
LAST: The price of the most recent transaction, often used as the live price on charts.
When setting up Limit Orders, these options help define how your trades are executed. Each has specific use cases, particularly for Stop Loss and Take Profit strategies.
Stop Loss: BID vs. ASK
A Stop Loss order helps minimize losses by selling your asset when its price drops to a specified level. Here's how BID and ASK prices behave in different scenarios:
Scenario 1: Using ASK for Stop Loss
You buy a coin and set a Stop Loss based on the ASK price. If the market experiences a sudden drop (a "dump") due to a large sell order, the BID price may dip below your Stop Loss while the ASK price remains higher. In this case:
Your trade remains open as the ASK price hasn’t reached your Stop Loss.
If the price recovers, you avoid selling at a loss prematurely.
Scenario 2: Using BID for Stop Loss
If you had set the Stop Loss based on the BID price in the same scenario:
The BID price would trigger your Stop Loss, closing the trade earlier.
While this could minimize potential losses, you might miss out on a recovery if the market rebounds.
Key Consideration
Using ASK can help avoid being "stopped out" prematurely, but it carries a risk of greater losses if the price continues to fall. BID is safer in volatile or thinly traded markets but might close trades too early.
Take Profit: BID vs. ASK
A Take Profit order closes your trade when the price reaches your desired profit level. Here’s how BID and ASK prices impact this strategy:
Using BID for Take Profit
We recommend using BID for Take Profit orders. Here’s why:
If a large buy order increases the ASK price significantly, the BID price may also rise.
Your Take Profit order fills at the BID price, which could be better than your target level.
Using ASK for Take Profit
While possible, using ASK for Take Profit might result in delays or missed opportunities, especially if the BID price doesn’t align with the ASK price.
Order Book Dynamics
Understanding Order Books
BID Side: Contains buy orders.
ASK Side: Contains sell orders.
LAST Price: Reflects the most recent transaction but may not be ideal for setting Stop Loss or Take Profit due to potential delays.
Thin Order Books
In markets with low trading volume ("thin" order books), price fluctuations can be extreme. Large orders may clear multiple levels on the BID or ASK side, leading to:
Greater slippage.
Increased risk of Stop Loss or Take Profit triggering at unfavorable levels.
ASK Price Follow
Example using Take Profit
You buy 1 ETH at $100 and set Take Profit of +5%, at $105.
After a while, ETH begins to increase, and the following occurs in the trades:
Example using Stop Loss
You buy 1 ETH at $100 and set Stop Loss of -5%, at $95.
After a while, ETH begins to drop, and the following occurs in the trades:
BID Price Follow
Example using Take Profit
You buy 1 ETH at $100 and set Take Profit of +5%, at $105.
After a while, ETH begins to rise and the following occurs in the trades:
Example using Stop Loss
You buy 1 ETH at $100 and set Stop Loss of -5%, at $95.
After a while, the ETH begins to fall and the following occurs in the trades:
Recommendations
Stop Loss: Use ASK in stable or heavily traded markets to avoid premature closures. Use BID in volatile or thin markets to minimize deeper losses.
Take Profit: Use BID to maximize profit opportunities.
Practical Tips
Monitor Market Conditions: Adjust your strategy based on volatility and trading volume.
Review Order Book Activity: Use order book data to anticipate price movements.
Combine Strategies: Experiment with BID and ASK to find what works best for your trading style.
By understanding the nuances of BID, ASK, and LAST prices, you can make informed decisions to optimize your trading strategy on 3Commas. Always consider market conditions and your risk tolerance when configuring orders. Happy trading!