Bid–Ask Spread
The gap between what the market will pay you and what it will charge you — your immediate cost of trading.
Quotes come in pairs: the bid is the best price you can sell at; the ask is the best price you can buy at. The mid is just their average and is usually not tradable.
If you buy at the ask and immediately sell at the bid, you lock in a loss equal to the spread — this is the friction every trade must overcome.
Spreads widen when liquidity is low or uncertainty is high, and they can explode in stressed markets.
Ignoring spreads (and other costs) makes backtests structurally over-optimistic, especially for high-turnover strategies.
Quotes come as a bid–ask pair: bid is where you can sell, ask is where you can buy. The dashed line is the mid price (average of bid and ask), a reference level you almost never trade at. The coloured band is the friction zone.
If you buy at the ask, value is marked to the mid: you are instantly down by roughly half the spread. If you sell at the bid, it is the same story in the other direction. A full round-trip (buy then sell) burns roughly one full spread.
The sliders show how this friction scales with position size and typical daily volatility. If the spread is a big fraction of a one-day σ move, small price moves are mostly eaten by costs: you need a meaningful move just to break even.
In control-system language, the spread is a deadband around the setpoint: inside this band, small “signals” (price wiggles) cannot be turned into actionable profit because friction dominates. Tight spreads mean a thin deadband and high effective liquidity; wide spreads are thick friction zones.