“Hit the bid” refers to an event where a trader or investor accepts the bid price that is currently available in the market.
Traders usually “hit the bid” when they believe the price of the asset is likely to go down soon, so they wish to sell at the current bid price before the price drops further.
To fully grasp what this phrase means, it’s essential to understand some foundational concepts first.
Bid-Ask Spread: The Foundation
Every financial instrument available for trading in the marketplace has two prices: the bid price and the ask price.
The bid price is the highest amount a prospective buyer is ready to pay for a particular asset. In contrast, the ask price is the lowest sum a seller is willing to accept for the same asset.
The difference between these two prices is known as the bid-ask spread.
This spread is a crucial indicator of the liquidity and volatility of the asset – a narrow spread often signals high liquidity and low volatility, while a wide spread can indicate the opposite.
Hitting the Bid: What Does It Mean?
In this context, “hitting the bid” refers to the act of a trader or investor selling a security at the current bid price.
This action is typically a response to a belief that the price of the asset will decline shortly. By ‘hitting the bid’, traders can offload their holdings and potentially avoid further losses.
For example, let’s consider a forex trading scenario involving the EUR/USD pair.
If the current bid price for this pair is 1.2000 and the ask price is 1.2002, and a trader believes that the Euro is about to weaken against the Dollar, they might decide to ‘hit the bid’.
They would do this by selling their Euros at the current bid price of 1.2000 USD.
Implications of Hitting the Bid
Choosing to ‘hit the bid’ can be a strategic move, but like all trading decisions, it comes with inherent risks.
While the primary intention is usually to mitigate potential losses from a drop in the asset’s price, there’s always the chance that the market could move in the opposite direction. This scenario could lead to missed profit opportunities.
Also, ‘hitting the bid’ is generally more applicable in active trading scenarios like day trading or scalping, where traders seek to profit from small price fluctuations in highly liquid markets.
For passive investors or those with a long-term trading strategy, such immediate reactions to perceived market trends may be less relevant.