In the cryptocurrency market, there are various ways to make transactions and earn money, the most common of which is trading. Unlike other trading methods, spot transactions are the easiest way to place orders in digital exchanges. Therefore, if you are interested in digital currencies or are active in this field, stay with us until the end of this article to better understand the concept of spot trading.
Introduction of spot transactions
Spot trading, also known as spot or spot trading, can be defined as the purchase or sale of an asset, foreign currency, commodity, or other financial aid to be executed immediately on a specific date.
Spot transaction means the physical exchange of a financial instrument with immediate delivery. The spot market is also called the physical or cash market because cash payments are processed without delay.
Since in spot transactions or spot trading after a transaction, the traded goods are transferred to the opposite point at the exact moment, this exchange is placed at the opposite end of futures transactions. In futures transactions, the traded goods are exchanged between the buyer and the seller on a specific date mentioned in the contract.
For example, suppose you choose the spot trading method to trade Bitcoin digital currency after the transaction. In that case, the Bitcoin is immediately transferred from the buyer to the seller. In contrast, in futures transactions, after the bitcoin transaction is completed on a specific date mentioned in the contract, It can be exchanged between the buyer and the seller. The buyer does not immediately receive his purchased bitcoins.
The concept of spot price in spot trading
The spot price or spot price, as the name suggests, means that, for example, the cost of the digital currency you want to buy right now is n dollars. The Spot Price, which individual traders determine, is constantly changing. For example, if at this moment you intend to buy Bitcoin through the spot trading transaction, it is 13 dollars, but this amount may remain constant or increase or decrease in another moment.
What is the spot trading market?
A spot market is where financial instruments such as commodities, currencies, and securities are traded for immediate delivery. Delivery is the exchange of cash for financial instruments. On the other hand, a futures contract is based on the delivery of the underlying asset at a future date.
Exchanges and over-the-counter (OTC) markets may offer local and futures trading. For example, all digital currency exchanges in Iran are in the category of the spot market, while CME, BAKT, and Bitmax exchanges are not in the spot trading market and only offer the futures market for trading.
How do spot trading markets work?
Spot markets are also called “physical markets” or “cash markets” because they are settled immediately when an asset is traded. However, a formal transfer of funds between buyer and seller (such as T + 2 in the stock exchange and most currency transactions) is possible.
If it takes time, both parties agree to trade “for now.” An unusual transaction, or futures, decides on a price now, but the delivery and transfer of funds occur on a different date.
Futures on contracts that are about to expire are also sometimes called spot trades because the expired warranty means that the buyer and seller immediately exchange cash for the underlying asset.
Types of spot trading market
Exchanges bring together sellers and traders who buy or sell commodities, securities, futures, options, and other financial instruments. Based on all participant orders, the exchange provides traders access to the current price and volume available.
• The New York Stock Exchange (NYSE) is an example of an exchange where traders buy and sell stocks for immediate delivery. This is a spot market.
• The Chicago Mercantile Exchange (CME) is an example of an exchange where traders buy and sell futures contracts. This is a futures market and not a cash market.
Spot trading and OTC market
Transactions directly between buyers and sellers are called over-the-counter (OTC). A centralized exchange does not facilitate these transactions. The foreign exchange market (or forex market) is the largest over-the-counter market in the world, with an average turnover of 5 trillion dollars.
The price can be fixed based on a spot or future price/date in OTC trading.
In OTC transactions, terms are not necessarily standard so they may be subject to the discretion of the buyer or seller.
An example of the spot market
An online furniture store in Germany offers a 30% discount to all international customers who pay within five business days of placing an order.
Alex, who runs an online furniture business in the United States, sees this offer and buys the $10,000 tables from the online store.
Because he needs Euros for this purchase and its immediate delivery. The EUR/USD exchange rate is 1.1233; Alex trades foreign exchange at the spot price to buy the equivalent of $10,000 in euros.
Of course, given the exchange rate of 8902.34 euros ($10,000 / $1.1233).
The settlement date of the spot transaction is T + 2; Alex will receive his Euros within two business days and clear his account to qualify for the 30% discount.
In general, it is the same for spot trading transactions in the spot market.
For example, a person decides to sell bitcoin, and a person in another country who wants to buy bitcoin chooses to do a transaction with this person by comparing its price in the spot market and the futures market. According to the terms and conditions of the seller, on a specific date, Bitcoin is immediately transferred to the buyer’s account.
The term Order Book in the spot trading market
An order Book is a list of purchase and sale orders of an asset each person has submitted in that exchange or market. To explain this concept in financial markets, suppose people who want to buy bitcoins register their purchase order in a business.
When placing an order, each usually registers their bid price and the amount of BTC they intend to buy.
On the other side of the market, some people want to sell their bitcoins at a specific price.
The group of these people are the buyers and sellers of Bitcoin. The exchange gives people all their buy and sell orders in one list.
This list of buyers and sellers is called an order book.
This order book constantly changes because when a buyer and a seller agree on a price, the exchange executes the transaction, and BTC is transferred from the seller to the buyer. So, in general, each Order Book consists of two parts: buyers and sellers. Generally, buyers’ orders are displayed in green, and sellers’ orders in red.
How to prioritize orders in the order book
As mentioned, the Order Book displays an asset’s buy and sell orders. Registering hundreds and thousands of purchase and sell orders per day or week is possible. The question raised is, with what priority do exchanges display these orders? Which orders are placed higher in this list, and which orders are placed in lower rows?
Suppose you want to sell bitcoins. Naturally, you prefer to sell your bitcoins at the highest possible price. On the other hand, a person who intends to buy BTC generally likes to buy this cryptocurrency at the lowest price.
Exchanges list these orders or the preferences of buyers and sellers in the order book. In the seller’s section, the demands that registered the lowest price among other sellers will be placed at the top of the list and among the first sales orders in that Order Book.
In the buyer section, the opposite is done; the orders offered the highest price among the buyers are placed at the top of the list and will be among the first purchase orders in that order book.
In general, the first sell order in the order book is the highest possible price at which the buyer can buy that asset, and the first buy order in the order book is the lowest price at which the seller can sell that asset.
The concepts of Ask and Bid and the power of liquidity in spot trading
After the order book in the spot market, learning the two concepts of Ask and Bid will be helpful. Ask and Bid refer to two specific prices in the Order Book.
Bid: Bid price refers to the highest price the buyer is willing to pay to purchase an asset. The bid price is shown at the beginning of the buyers’ order list in the order book.
ASK: ASK price refers to the lowest price the seller has offered his property. In an order book, the ASK price is the price that is placed at the beginning of the seller’s order list.
Power of liquidity: The lower the difference between the highest price in the seller’s ASK price and the lowest price in the buyer’s Bid price, the higher the liquidity in that market. For example, Bitcoin has a very high liquidity in the Binance exchange because the difference between the prices offered by buyers and sellers is minimal.
Introducing the types of spot trading orders
In the following, we refer to the types of trading orders in the spot markets. As we know, different types of buy or sell orders exist in the financial markets. If you have experience working with prominent exchanges such as Binance, you have come across the options offered by this exchange when buying and selling a digital asset. In the next part, we will describe some of them:
Limit Order
A limit order or an order with a specific price is one of the easiest ways to place a buy-and-sell order. For example, if you want to buy 1 Bitcoin for $13,200. When placing an order with this method, two parameters of price and purchase amount must be determined.
The purchase price is entered in the Price section, and the amount is in the Amount section. Finally, your order will join the Order Book by registering the Buy or Sell button.
Market Order
In this type of order, we only determine the amount of buying or selling a digital asset, and we allow the exchange to sell the help we need at the price of the last transaction in the market. The same is done for shopping.
Stop-limit
This type of order is divided into two parts. Stop Limit Order gives traders more parameters than the previous two orders. First, we will introduce a limit. Stop Limit Order is the same as Limit Order, with the difference that there is a precondition for this order to be activated.
For example, Bitcoin costs $ 1,000, and the goal is to buy it when it crosses the $14,000 resistance. So, the cost of Bitcoin traveling 14,000 dollars is the condition of this order. This condition is called stop. To register this order, three components are required: purchase price or Limit, purchase amount or amount, and state of purchase or stop,
Finally, the exchange executes the order according to the price recorded in the Limit.
But this order is made if the stop price condition is established, and it will be placed in the Order Book. After the stop condition is found, this order will become a limit order.
OCO Order
This order stands for One Cancel the Other. This order is a combination of Limit Order and Stop Limit Order, and when the conditions of one of these two are met, the other order will be canceled.
In this order, four components must be determined by the trader.
For example, 1 Bitcoin is entered in the Amount field. The price is entered in the Price section. This price is entered in the Order Book, and as soon as the cost of Bitcoin in the market reaches this set price, the order is made.
The Limit section is the price at which the trader intends to buy this asset, but this order also has a Stop or precondition. The price registered in the Limit will be entered in the Order Book only if its precondition, i.e., stop, is active.
Otherwise, this order will not enter the order book.
For example, suppose that the price of Bitcoin is currently $13,200 in the market. According to your analysis, $14,000 is resistance, and $12,500 supports Bitcoin. Based on your trading strategy, if Bitcoin crosses $14,000, you will buy it, or if the price reaches $12,500, you will buy it because of the support point considered for Bitcoin.
In this case, you need an OCO order when the Bitcoin purchase occurs at two different points. In the Price field, enter the number 12500 dollars. Because the price of Bitcoin is currently in the range of 13200 dollars, your order will be entered into the order book at the exact moment. If Bitcoin reaches 12500 dollars, your order will be automatically Completed.
In the stop section, enter the entry condition for the other mode, which is assumed to be $14,000 in this example. In other words, you tell the exchange to enter my order in the order book if the price of Bitcoin breaks $14,000 and enter the desired price in the Limit section; for example, you have chosen $14,050.
When Bitcoin crosses $14,000, your purchase order will be entered into the order book at $14,050. The sales order mode will be the same as buying, and there is no difference.
last word
This article will familiarize you with spot trading and how it works in the digital currency market. We also explained the details of Spot Trading in popular exchanges such as Binance and learned about the types of orders.
In addition to these types of transactions, some futures contracts offer traders more choices. But still, this type of transaction is among the most popular transactions in the digital currency market.