This may seem like a very odd question for me to be asking after all this time but it’s something that I’d just like to get some feedback on (for my own sanity)!!! LOL!!!
Let’s assume the following:
[ul]
[li]Your charts only show the BID (SELLING) price.[/li][li]You’re trading the Dow (which moves in points i.e. simpler to explain).[/li][li]The spread is 6 points.[/li][li]Your trading system requires that you place buy or sell stop orders at 5 points above the high or below the low of a signal bar.[/li][/ul]So here’s the ‘issue’:
Let’s say that the high of your signal bar is 11 000. As per your trading system: you are required to place a buy stop order 5 points above the high of the signal bar. So: should you place your buy stop order at 11 000 PLUS the spread of 6 points PLUS the required 5 points OR should you place your buy stop order at 11 000 PLUS ONLY the required 5 points???
Also: would you agree that when you are required to place a sell stop order the spread is of no consequence (given that your charts is showing ONLY the BID (SELLING) price) i.e. you would place a sell stop order at the low of your signal bar LESS ONLY the required 5 points???
Following on from the above: would it be fair to say that if your charts only show the BID (SELLING) price that you COULD ACTUALLY say that the ACTUAL high of a bar is ACTUALLY the high PLUS the spread???
If you are using Metatrader I’d say the answer is yes, but on Oanda the candle represents the ‘average’ price, so the bid is a little below the low and the ask is a little above. (I think!)
Unless your rules are for scalping really small trades I don’t think it matters how you figure the spread. I would be consistent though it is a variable in your trade plan you have control over and as such it can be tested.
here is a chart showing bid and ask I have gotten used to looking at this and it becomes quickly apparent how hard scalping is. this is from FXCM’s strategy trader.
Even if you’re shown bid only, you’ll need the ask when you’re jumping in. So you should factor in spread, i.e. add spread 6p to the 5p, because looking at your chart price gets to your buy 6pearlier than your chart shows you? If your don’t do it at entry you still have to fumble that question at exit - assuming the less-desirable fixed spread situation!
Wtsup Dale, care to show us some of your DJIA charts?
Mean price = (Ask-Bid)/2. I wouldn’t care with swing or position trades about a pip or two, because there are also small differences between broker price feeds, but I do care with my scalp bot until the extent of one pipette for entry and exit rules.
Thanks so much for the input. It’s something that’s ‘perplexed’ me for the past few years (as silly as that sounds i.e. I guess it’s pretty ‘simple’ is it not)!!! LOL!!!
It would appear we’re all ‘on the same page’ then as it were i.e. I’ve always been inclined to factor IN the spread if the chart your’re working from only shows the bid price. It’s just that sometimes (depending on the instrument being traded and the price) if you DO factor in the spread the price of your order ‘looks’ so far away. It’s one of those ‘psychological issues’ i.e. when it’s an ENTRY stop order you sort of ‘wish’ that you HAD NOT factored in the spread but if it’s a stop loss order then you’re GRATEFUL that you did!!! LOL!!!
On a serious note though: it can make the difference between getting into a (long) trade that you should not be in or getting stopped out of a (short) trade prematurely. I have the choice of displaying the bid, middle (‘mean’), or ask prices on my charts but I’ve noticed that in the cases where the bars are drawn based purely on the bid price (such as with MT4) then and ONLY then do you see the difference that a variable spread actually makes!!! In other words: with a variable spread the ask price is the one that is ‘adjusted’ to compensate for the variable spread not the bid price.
While I may agree that with swing or position trades it should not REALLY make a difference it does depend on the spread of the instrument being traded e.g. USD/ZAR (500 pip spread) or USD/RUB (1 500 pip spread). See my point???
One other observation (just sharing knowledge here is all) especially with the indices: placing an order ‘five ticks’ above the high or below the low of you signal bar does not necessarily mean simply adding or subtracting 0.05 to or from the price if the price is being quoted with two decimals!!! With some indices the minimum tick value is, say, 0.50 so being required to place an order ‘five ticks’ above the high or below the low of your signal bar would mean that you place your order at 2.50 above the high or below the low of your signal bar and not simply 0.50!!!
As a matter of fact: there are some interesting ‘little things’ that I’ve come across in the past few months or so. As an example: have you ever asked yourself why a certain commodity is traded in a certain unit of measure??? Normally it’s something like ‘how many units of the said commodity fitted on a railway car’!!! As a matter of fact: I seem to recall reading somewhere why a ‘tick size’ of ‘1.25’ (or was it ‘12.50’) is significant but I cannot (right now) recall the details but all of these ‘tick sizes’ and ‘units of measure’ are based on certain ‘anomalies’ (for want of a better description) from years gone by that have just stuck with us to the present day. If anybody knows of some of these ‘anomalies’ then please post details i.e. this type of thing intrigues me NO end!!! LOL!!! Here is an example: Futures Tick Size.
Anyway and as I said: thanks for the input. I just wanted to FEEL ‘sane’!!! LOL!!!
Press the [B]<f8> function key[/B] and then click on the [B]COMMON[/B] tab and check the [B]show ask line[/B] box. The chart will show the ask and the bid lines.
Thanks for that Pierce. True: that shows the ask price (in MT4) but that’s not the issue really. Actually: your post highlights the point i.e. the bars in the chart itself are drawn and displayed using ONLY the bid price (even if you are using the option to show the ask price). If you are trading with fixed spreads (and this was what I wanting to clarify): you need to add the spread to the to any buy stop order value that you place (which means that any buy stop order will be placed at the ask price really). To my mind: if you don’t do this your system will have a certain ‘bias’ (for want of a better adjective). If you don’t add the spread to any buy stop order that is placed: you’re then in effect placing those very stop orders at price lower (lower by the spread) than they should have been placed and as I’ve noted: A LOT of the time this makes the difference between getting into a trade too soon or getting stopped out prematurely (ESPECIALLY when trading instruments with very large spreads).
On a sidenote: somebody on these very forums posted a MT4 chart that displayed this very phenomenon in relatio to variable spreads (but I just cannot find the post) i.e. I remember that the poster simply coded an MT4 inditcator that show the ask price on the chart as continuous line and it was quite interesting to see what it’s effect could be on trades and even THEN it could not be accurate because the line could only have been showing the ask price at the close of the bar i.e. who knows what was happening during the formation of that bar!!! Actually: the chart posted by Shr1k is depicting pretty much the same thing and is very interesting.
(By the way chizzenpips: I’ve not posted a chart of the Dow i.e. nothing to show really i.e. I just used the Dow as an example because it’s quoted in nice ‘round figures’ is all)!!! LOL!!!
Anyway (for those interested): that link that I posed ‘Futures Tick Sizes’ is NOT correct or accurate (just by the way) i.e. the only reason I posted it was for the ‘interesting’ note at the top of the page as to why certain commodities are traded in particular units of measure. The CORRECT tick sizes (and I can only assume they’re correct because these are from the ‘source’ as it were) can be found here: Euronext - Product information > Summary Contract Specifications (just click on any ‘product’ and you’ll find a whole bunch of information in addition to the tick size and tick value). Of course: this does not affect forex traders i.e. the minimum ‘tick’ or ‘pip’ value is always 1 e.g. EUR/USD is 0.0001 and USD/JPY is 0.01 (that type of thing).
By the way: I’ve been wracking my brain to remember what that thing was about why the figure 1.25 or 12.5 is ‘significant’ and I seem to remember (this morning) that it had something to do with Spanish coins or something like that or it was the smallest denomination of coin at the time or something like that (if anybody knows this information please post for posterity because I cannot find the article and I’m sorry I never bookmarked it when I found it).
Yep: that’s ‘kinda like’ the way I understood it and have been doing it (and yes: if your charts can show the middle price then you must add or subtract half the spread).
I guess the only reason it’s been ‘playing on my mind’ is because (and this is an example): if you’re trading an instrument which has a ‘low’ (‘relatively speaking’) price e.g. Citigroup which closed at $4.76/$4.78 (the spread is $0.02) on Friday then (when required) I would place a buy stop order at let’s say the high of the signal bar (whatever the price may be) plus the spread plus 0.05 (if I were using five ticks above the high of the signal bar). I’ve coded an indicator that basically tells me what my order prices should be at any given time (assuming that I use a chart showing only the the bid price it indicates simply the high plus the spread plus whatever offset I want to use OR simply the low minus the offset that I want to use) (and it draws little ‘dots’ above or below the bars to denote the order prices). What’s ‘funny’: on a daily chart it’s ‘nothing’ but take a look at an hourly chart and those buy stop order prices ‘look’ WAY far away BUT it’s only due to the scaling of the chart is all (if Citigroup was being quoted as 999.99 it would not be noticeable). It’s the same thing as say comparing EUR/JPY (price is currently quoted as 999.99) and HKD/JPY (price is quoted as 99.99). Both have the same spread. HOWEVER: when you add the spread of 2 pips plus the offset of say 5 pips on EUR/JPY on the shorter timeframes it ‘looks’ alright but on HKD/JPY the orders ‘appear’ to be FAR away but again only because of the chart scaling and the ‘format’ of the price quote. BUT: no matter what it ‘looks’ like the order prices are indeed correct as we have discussed.
Personally: I think that this is something that a LOT of new traders overlook i.e. not including the spread when placing buy stop orders (and as I said: variable spreads are another ‘story’ altogether)!!!
Call me stupid, but I pretty much ignore the spread altogether. I do look to see what it is, from time to time. But since I can’t really control that factor, I figure it’s kindof irrelevant.
Now don’t get me wrong… if the spread doubles or more, then I’d be concerned and probably sit on the sidelines. But so far I have not see that happen yet.
When I was swing trading, I kept up with the spread like a hawk, always adding it to buy orders (on FXCM or IBFX). Now I’m scalping the 30sec chart and I have this goal to completely eliminate math from the equation. Backwards logic? Maybe.
It’s just that I’ve spent a LOT of time looking at stuff like this and I’ve found that a LOT of the time, when placing buy stop orders, particularly on instruments with large spreads, simply ignoring the spread more often than not will result in your opening a trade or stopping and reversing when ACTUALLY you should not / would not have been in that trade. I don’t ‘believe’ in trading anything shorter than the daily timeframes but even on these timeframes this can be an issue. And for a ‘scalper’ I think that this is even MORE of an issue ESPECIALLY when trading with variable spreads (which I personally ‘detest’ because for ONE thing a variable spread can very easily be cited as the reason for a stop order being executed while it may APPEAR on the chart that price never went that high). That said (and I guess this is more of a question than a statement really): THEORETICALLY a ‘scalper’ should be able to make money out of the spread (but only when going long)??? For example: I’ve seen variable spreads on EUR/USD go as low as 0.1 pips. So if you buy when the spread is 0.1 pips and then the spread increases to say the ‘norm’ of 2 pips then surely the difference in the ask price (because that is the one that is ‘varied’) would result in a profit??? Or am I ‘totally loopy’ here??? (Don’t get me wrong: it’s not something that I would ‘try at thome’)!!! LOL!!!
You would place the buy stop order at 11.005 because the order will execute if and when the Ask price reached that level, even though the chart is displaying the bid price, the bid price is irrelevent because you cannot trade on it with the buy stop. The spread itself doesn’t matter because no matter what the spread is, it is factored in when you open your order when the Ask price reaches that level.
Following on from the above: would it be fair to say that if your charts only show the BID (SELLING) price that you COULD ACTUALLY say that the ACTUAL high of a bar is ACTUALLY the high PLUS the spread???
Yes that is true, and in fact if the chart was created from the Ask price instead of the bid price, the bars would be the higher than they are, but you wouldnt be able to sell at the highest price they show, because the sell price is the bid so the top 6 points of the bar would be unatainable.
This is why going back to regular charts, the bottom of the bar is unatainable to buy on, the ask price never reaches that point, in some of my own indicators I remove the spread from the bottom of the price for instance a short periods moving average of the low+spread gives a moving average a little higher than the actual chart lows, therefore allows more valid buy positions if the buy criteria demands the order go in below that MA.
Now JUST when I feeling comfortable in my understanding YOU come along with that post of yours!!! LOL!!!
The SECOND part of your post I do understand but there I’m assuming you’re talking about LIMIT orders e.g. for a LIMIT buy order to be executed at 10 000 then the bid price would have to move down to 9 994 thus the ask price at the time would be 10 000 which is quite correct (again assuming the Dow with a spread of 6 points and I’m not bothering to add or subtract an offset here in this example). But what about a LIMIT sell order???
I guess what I’m getting at is this (and if you have the facility): when wanting to BUY something you look at the ASK chart and when wanting to SELL something you look at the BID chart??? This would be the exact same thing as adding the spread to the BID chart not so??? OR is it the other AROUND i.e. in order to compensate for the spread one should look at the BID chart when wanting to BUY something and look at the ASK chart when wanting to SELL something (this would effectively be ignoring the spread or possibly even be subtracting the spread)???
Nah: I’m getting confused AGAIN now!!! LOL!!!
I just don’t see how the spread can be ignored or that it’s ‘already factored in’ as you put it. Some more explanation perhaps???
well what I mean is, if like you said your trade criteria demands you open the order when the price is 5 points above a signal line, and the signal line is at 11.000 then you set your buy stop order at 11.005. The order would open when the ask price reaches 11.005 and on your trading log it should read the order was opened at 11.005
That is what I meant when I said the spread would be already factored in.
For sell limit orders you would do the same thing, you enter the actual price you want the order to open, it will open when the bid price reaches that level and in your trade info it would say the order was opened at that price.
One thing that could make it all different is if you were asking what should you do if the trade criteria requires you should open your order 5 points above the current Ask price, but your chart is showing only the current bid price
If that was the case then you definately would add the spread, if you have a fixed spread of 6 pips you would set the order at 11.011
So while your chart shows the high of the bar at 11.000 the Ask price with a spread of 6 at that time would be 11.006 and you want your order to go in if the price reaches 5 pips above that it would be 11.011
This would be difficult to do if you have a variable spread because when setting your buy stop order you wouldnt know how many pips to add on for the spread at the future time when the order is executed.
I would add that I agree with whoever it was said definately not a stupid question, this all gets confusing I had to edit my last post twice because I realised I had got it wrong lol
I know what you mean i.e. I’ve started typing at LEAST three more responses and then deleted them because I was starting to confuse myself!!! LOL!!!
I’m going to give it another ‘bash’ a bit later i.e. try to explain more clearly what my ‘issue’ with this is!!! LOL!!!
One thing: I tend to TRY to only trade with fixed spreads but that would limit me to the indices (and, uuurgh, forex pairs) i.e. commodities and individual stocks all have variable spreads and in order to SOMEHOW ‘compensate’ for this I have a list of what the spreads are OUTSIDE of the trading hours of the individual instruments e.g. over a weekend i.e. it’s as close to a ‘normal’ ‘fixed’ spread that I can get on the individual instruments and the spreads shown for the individual instruments are always the same OUTSIDE of the trading hours of the individual instruments so it gives me SOME level of ‘comfort’ I guess. Some examples: the ‘variable’ spread for Citigroup is ALWAYS 0.02 OUTSIDE of it’s trading hours and the ‘variable’ spread for Sugar is ALWAYS 0.07 OUTSIDE of it’s trading hours. That type of thing. The only other way to do it (which is painful) is to see what the spread actually is AT THE EXACT TIME of placing your order but I don’t think that this would make that much of a difference really. I suppose one could also use the spread that PREVAILED at the close of your signal bar but again I’m not sure how much of a difference this would make either.
One thing I’ve NOT checked is this: when the spreads vary on commodities and individual stocks do BOTH the bid AND the ask prices vary or is it only the ASK price that is varied as is the case with MT4 and forex pairs i.e. at a variable spread broker using MT4 it is the ASK price that is moved closer to or further away from the bid price in order indicate the current variable spread (almost as if the bid price is the ‘given’ but then again this is on a bid price only chart i.e. I suppose on an ask price only chart the inverse would apply??? Or would it)??? Now here I’m confusing myself again!!! LOL!!!
Just to add to the confusion (and while I’m thinking) here’s another question (that may or may not ‘shed some light’ on the subject):
If I’m looking at a daily chart of the Dow Futures at the CLOSE of the trading day then where did it close (take yesterday for example): it closed at 11 422 (bid price chart) OR 11 425 (middle price chart) OR 11 428 (ask price chart) (6 point spread)??? LOL!!! Assuming NO spread where did it close??? ‘Pick a price’!!! LOL!!! Oh but WAIT!!! Now we’re going to have a different close depending on the timezone of the chart!!! LOL!!! BAD EXAMPLE (but you ‘get my drift’)!!! LOL!!!
Best would be the charts are based on mean price. Because that is the real price. Rare to see, however.
If you only have a chart where prices are based on bid like MT4 don’t worry about ask or mean price, because you can only see the charts which are based then on bid price. This is not a problem with targets or sl larger than 10*spread or so, because the highs are based on pips as the lows. It doesn’t make a difference if low is at 1.0000 and high at 1.10000 or low at 1.0003 and 1.1003. It’s still 0.1 difference in price. Same with open and close.
If targets/sl become lower than 10*spread then this might become an issue, because the spread runs you sell sl’s easier than your buy sl’s. Same with targets.
Anyhow, if your target/sl is less than 10*spread then you have for sure to look for mean price if you want an optimal strategy, because that is the only real price then what matters. Interbank spreads are very thin and mean is the closest to that.
Unfortunately, there is no way to circumvent this in MT4, because the charts give you only bid prices. You would have to calculate the mean price of the key chart levels for yourself with an indicator or code or something. If you show the ask price in the charts it doesn’t change the charts. It just shows you the current ask price which is forgotten a few seconds later.
Hmm… never thought of that. I bet you’re right about the stop-hunting thing.
That said (and I guess this is more of a question than a statement really): THEORETICALLY a ‘scalper’ should be able to make money out of the spread (but only when going long)??? For example: I’ve seen variable spreads on EUR/USD go as low as 0.1 pips. So if you buy when the spread is 0.1 pips and then the spread increases to say the ‘norm’ of 2 pips then surely the difference in the ask price (because that is the one that is ‘varied’) would result in a profit??? Or am I ‘totally loopy’ here??? (Don’t get me wrong: it’s not something that I would ‘try at thome’)!!! LOL!!
I could be wrong about this, but I think Oanda processes their spreads different than all other brokers (that I’m aware of). Instead of the typical scenario where we have a bid-based chart and the broker charging the spread on buys only… in Oanda it appears that we have a chart based on the average of the current bid/ask, and it also seems that they charge 1/2 the spread on every order buy or sell. (Someone please correct me if any of this is wrong – I really want to know the truth on this.)
If this were true, it could really help trader psychology. The mind plays a lot of games on you when you’re analyzing the charts and we are visual beasts by nature. The broker has to hide their spread somewhere, right? Instead of it being a “surprise” that we get hit with on every buy, it seems somewhat brilliant for them to just include it always. That way when we are buying and selling, everything is consistent to our brain. In that way, it would be much easier to train our subconscious with a fluid trading technique. It is very non-standard to try to train your brain to add spreads in only one direction IMHO.
