Spread = Not exactly a friend in the field

Hi guys,

I need some help understanding how spread works. Truth is I’ve been having some unfortunate spread related incidents and maybe I’m looking at this the wrong way and someone out here can give me a hand.

Here’s one of the examples of those ‘‘incidents’’…

Let’s say price is at 0.9226 in the USDCHF chart and I determine that I want to start selling at 0.9236 and my stop loss is at 0.9244. Later on I see price move in to my selling area and as it touches 0.9242 my order results in a loss even though I said 0.9244. Then the saddest part is that I see price go down at least three times what I risked without touching my stop loss but somehow I’m already out.

Now that was the scenario for exiting a trade but the opposite is also true. I’ve seen trades that touch my selling area and maybe continue in it for a pip or two and my order is not even filled… I noticed that for my order to get filled it needs to enter the level by more than 1 or 2 pips. Anyways I know that’s what we call the spread but can someone tell a way around this so I could remediate the situation.

I know you can’t get rid of spread but in my case should I wider my stop loss? But then if I do that I need to wider my take profit as well… Ouf… Need some help fellas!

Thanks in advance!
Cubanopro

Who is your broker?

Someone said and I cant remember who, but either variable spreads or locked in spreads will give you a better chance of filling orders more precisely. I can’t remember which way it is though, I am thinking variable spreads are better for more precise order filling. Don’t hold me to it.

fihunts Thanks for the quick response!

At the moment I’m still practicing on a demo account. I use mt4 with Fxpro. Personally I don’t think that it’s wise to start risking money and still ask questions in the “newbie” section. Therefore lol as I still consider myself a rookie, I prefer using only demo for the moment.

I also only use pending orders instead of instant execution (I don’t know if that changes something when it comes to spread).

Great Question!

Well I would first say that trading with 8 pip stop losses is too small, but it is your choice.

As to your question. If you sell at 0.9236 with a stop loss at 0.9244, then assuming your broker has a 2 pip spread on usd/chf your stop loss order which is a buy order will get executed when the offer price is at 0.9244.

So that means that when the market is trading at 0.9242 bid 0.9244 offers, your stop loss order will get triggered and your buy market order will get filled t 0.9244. Your charts generally show the bid price so you will see 0.9242 on your charts. But with the spread your stop loss order will get triggered.

That is standard practice with most retail forex brokers. Buy orders are filled at the offer price, sell orders are filled at the bid price.

If the spread was large in the that situation then you would of been at an even bigger disadvantage. Also note that you weren’t really using an 8 pip stop loss, it was actually a 6 pip stop loss, since you had to factor in 2 pip spread.

Yes I would recommend using at least 15-30 pip stop losses. Anything under 15 pips and the spread cost typically is very high.

Hope it helps.

Wow what a response! Thanks a lot this did helped me. However I still have some questions if you don’t mind.

What would say concerning what I mentioned when entering a trade? The order is not filled but it still touched the line… What should I do? Enter 2 pips earlier?

And also I always measure my take profit in consequence of my stop loss. I try to do 2:1 or 3:1…If I wider my stop loss then my take profit will also be further away…

I don’t know much about FXPro, but I’m live with 100 bucks in IBFX and everything has executed when I pull the trigger. However, I have done a few pending orders here and there. I have to admit, sometimes pending orders do not seem to trigger when I think they should, but they will execute within a couple pips. You might try setting your sell order slightly earlier than what you would do if you were manually executing the trade.

Definitely demo account for a while, but I really had to get a taste of the emotional roller coaster that comes with live trading. Even when I am trading a 1000 lot (micro lot) or 500 lot (5 nano lots) I can feel my heart race a lot more than it did when It did when I was trading funny money. However, after trading for almost a week, I am starting to calm down. I did trade demo’s for about 4-5 months. Heh, the first account I had $50,000 of funny money. I was killing it! LOL!

Another suggestion is, you might want to try several Demo accounts and find one that works the way you want it to or close to anyway. As said above, I use IBFX. There are several though and I would do demos on all of them. Oanda I understand is very good, IBFX, FXCM, PFG Best.

Before you get into any of them, test out there customer service and keep an eye on their spreads.

Thats about all I can think of right now.

Anyway, Cheers and good luck

Thanks a lot! Wow I didn’t know people were so helpful here… Anyways I already use 3 different demo accounts (alpari, fxcm, fxpro) but like futuresforex mentioned, I don’t think it has anything to do with the broker. Every broker charges commission (spread) and that’s why it doesn’t matter which account I’ll use, the same thing will keep happening.

Anyways I think I’ll just try to wider a bit my stop loss as well as my entering line but without touching my take profit.
This has been helpful fihunts! Thanks!

Right as to regard to limit orders let me explain it. A limit sell order will get executed when the bid price reaches your limit sell price.

A limit buy order will get filled when the offer price hits your specified limit price.

So if you had a limit sell order at 0.9236, and the market is trading at 0.9234 bid / 0.9236 offered. Your limit sell will not get executed. The bid price needs to hit 0.9236 for your sell limit to execute and get filled at 0.9236. That is how most brokers do it, especially retail.

So in order for your limit sell to get filled the market needs to trade at 0.9236 bid / 0.9238 offered. Then your order will get filled. That is assuming a 2 pip spread for USD/CHF. And when your limit order executes you would obviously be down 2 pips on the trade, because if you covered at the market price your buy market order would get filled at 0.9238.

Take profit can be measured as some multiple of your stop losses, or you can have a take profit set according to what chart patterns you see, or what is going on in the market.

Yes the wider your stop loss, generally you need bigger winning trades. But they can happen. You can definitely place trades with 100 pip stop losses, and make 300-500 pips on them. They happen a few times per month, so don’t expect to be placing 10 trades like that per day.

Very good answer! Now I understand and it makes sense. In other words every time I’m selling (sell limit) my order will not be filled until the “bid” touches my price and every time I’m buying (buy limit) my order will not be filled until the ''ask" touches my price.

Are you the one talking in the video? Very nice ROI and also very informative explanation! Thanks again!

Yes. That is how it is for retail forex. You always buy at the offer price and sell at the bid price. You do not have the ability to buy on the bid, or sell at the offer. That is how it is and how the brokers do it in order to make some money off the spread.

Larger players, institutional players, and market makers have the ability to place limit orders and wait for another market participant to come in and issue a market order and get filled.

So if they had a limit sell at 0.9236 and the market was trading at 0.9234 / 36 and another market participant issues a market buy order they can get filled at the offer in that case without having price move 2 pips. The price does not need to move that extra 2 pips to get filled for them.

Yes that is me talking in the videos. If you can wrap your mind around not having to trade with such small stop losses (less than 15 pips) you can become a better trader in my opinion. You can absolutely find trades that win you anywhere between 2-10 times what you risked on them. They just don’t happen that often for day traders who trade with teeny tiny 5 pip, 10 pip stops so they get frustrated and think the game is stacked against them.

Thanks a lot futuresforex you seem to know your stuff. As for me, I don’t choose to have a stop loss for less than 15 pips just because I don’t like big stops. I like the 1 hour chart and sometimes it happens according to my plan that stop loss are quite small. My stop loss are not chosen by their size, but by what I see on the charts according to very basic supply and demand. I don’t use indicators either (I personally think they are a waste of time since the information they present is based on past events…).

However I will listen to your advice and maybe try 4h charts = higher stop losses

VIVA CUBA!

De que parte de Cuba vienes??? Anyways nice explanation my friend!

Wow que casualidad… nací en la Habana (en el vedado) y viví ahí siempre hasta que me mudé para Canadá. Yo estaba al lado del Habana libre en 25 entre K y L. Y tú? Compadre que felicidad de ver que no soy el único cubano aquí!

Where do you guys get this info?? Do you work on a trade floor :p? Haha just kidding! But seriously since when have you been trading the Forex market?

El placer es mío! Espero que nos hablemos de nuevo compadre.

Cuídate!

PD: Mis dos mejores amigos en este mundo son rusos… Creo que estas en buenas manos! hehe

There are of course different levels to the forex market as there is no one central exchange. And everyone trades at different levels. However if you are trading retail forex, you pretty much have no choice but to accept the fact that when you buy you have to either execute a market order and pay the spread, or you place a limit order and hope that the market moves that extra spread amount to trigger your limit order. Vice Versa for sell limit orders.

The big players have the [U]choice [/U]of executing market orders or ‘real limit orders’. Real limit orders meaning they can place a buy limit at lets say 1.3650 and it will get triggered if some other market participant executes a market sell order and they are best bid at that time. That is assuming the market is trading at 1.3650 / 52 and you are the best bid at 1.3650. In such a situation they are buying on the bid. They do not have to wait until the market moves down to 1.3648 for their buy limit to be triggered. You as a retail trader have to wait for that to happen. That can mean less pip profits, or missed trade opportunities. Just know the disadvantages you are trading with thats all.

Hi,

I’m ever so pleased that this subject has been addressed here because there certainly does appear to be a lot of misconceptions in this regard.

Here’s my input:

As a retail trader: at best you’re tying to anticipate and follow what the institutional traders and the markets are doing and, as noted, you have to wait for the market to come to you.

Here’s one of my favourite examples and although it has to do with commodities the forex market is no different (it’s just easier to explain in terms of commodities):

Let’s say that you ‘own’ corn that you ‘bought’ for say $700. Now let’s say that for some or the other reason you need to rid yourself of this corn urgently. You make it known that you’re prepared to sell your corn (obviously at a loss) for $600 even although the current market price is around $700. The moment that somebody sees and accepts your price of $600 being offered (which obviously would happen very quickly in this instance) the price of corn would spike down to that price. This is what you, as a retail trader, would see on our chart. In other words: once the orders (buyer and seller) have been matched and executed the price of corn would spike down even if it’s only ONE trade. What would happen in this case is that the buyer would buy your corn at $600 and immediately try to sell it at a higher or current market price which, in its turn, would make the price of corn move obviously. That is TRADING in the true sense of the word. A lot of people don’t seem to understand what the words TRADING and MARKET actually mean. That’s why I’ve noted before: as retail traders we’re following what we think or hope the market is going to do by means of technical analysis or fundamental analysis and stuff like that. It’s also another reason why, if you look very carefully at any video or picture of one of the exchange floors, you don’t see electonic charts posted anywhere. You see only price quotes (well a lot more if you know how to read the ‘ticker’). Floor traders are TRADING in the true sense of the word. They’ll buy and sell many times during a day sometimes for only a gain (or loss) of only a few points. I guess the ‘retail’ equivalent of this would be ‘scalping’.

As a retail FOREX trader the closest you’re going to come to this type of ‘action’ is to trade with a broker that offers L2 (which shows you the market depth i.e. it shows you where, the best ten, in most cases, bids or offers are located. The drawback is that because FOREX is not traded on a central exchange there is no way of obtaining this information for the FOREX market as a whole and you would be limited to seeing the best ten bids or offers at YOUR broker or, if your broker uses other liquidity providers and counterparties, you’d see the best ten bids or offers at each of these other liquidity providers or counterparties as well).

I hope that makes things a little clearer.

That being said: this part (the above) of the discussion may very well be off-topic.

The spread is just something that you have to live with. If a broker does not offer a spread then they’ll charge commissions. Same thing (and in my opinion the latter would be the better way to do things). That’s the broker’s income for offering the service (unless the broker is also a market maker of course). As long as you remember to compensate for the spread then you shouldn’t have a problem. Think of it in much the same way as bank charges. I deposited cash just yesterday and a certain fee is deducted from the deposit. The spread is nothing different.

Regards.

Dale.

Very interesting! I loved the corn example…Unfortunately people nowadays mostly think how can they make BIG profits instead of making sure they understand the very basics of the market. Guys I suggest you go watch some webinars or read some articles written by one of my favorites mentor : Sam Seiden.

He dislikes indicators and even fundamentals to that matter because he says all the information needed is right there in the charts. No need to get fancy, it’s all a question of whether or not you can understand what’s happening behind the bars. Anyways I like your vision of the market dpaterso!

I’m still a rookie (I’m also only 23) and next month it will be a year since I first started to read about the spot market. I hope I can become comfortable trading within the next year. Patience and discipline are key here!

To your success fellas!

Good morning and thank you for the compliment(s).

And you are QUITE correct in what you say (about people not understanding the very basics of the market). I used to be like that too but after some huge initial losses I had a choice: walk away or learn REAL fast!!! LOL!!! I chose to do the latter and am quite proud of myself for having done so even if I DO have to say so myself!!! LOL!!! It’s a wonderful business if you see it for what it is and ignore all the ‘Hollywood Hype’ and the all the other ‘bulls*it’ promises’ that we’re all inundated with on a daily basis AND, of course, if you realise that you’re NOT a Wall Street trader or floor trader at an exchange. Once you understand that then your entire perception changes and only then can you ‘get to grips’ with what it is that we’re ACTUALLY doing here.

I shall take a look at some articles by your favourite mentor (I’m almost sure I’ve come across him now and then over the years).

I’ll tell you one thing: you’re obviously taking the right approach i.e. getting to know the markets etc. BEFORE you start trading!!! LOL!!! In retropsect I wish I had done the same thing i.e. I could have saved myself a whole LOT of pain, anguish, and or course, money!!! LOL!!!

You just keep going and ignore the naysayers. I believe this to be one of only a few professions where there is no ‘middle of the road’. It’ll either ‘make you’ or ‘break you’. Nothing inbetween. And yes: patience and discipline are key. Trading systems are ‘a dime a dozen’ but without patience and discipline (and I include risk and money management with discipline) they’re useless.

Any help that you may need: let me know. I’m not ‘the expert’ but I’ve learned a few things along the way I think.

Regards,

Dale.

Correct me if i’m wrong, but if trading with the ECN broker, there shouldn’t be any spread issues. At least with the major pairs.

Hello.

I’m correcting you: you’re wrong!!! LOL!!!

Seriously though: I’m not sure what you mean by ‘spread issues’. With an ECN broker you will in all probability have no option but to trade ONLY with VARIABLE spreads which, to me, is and even bigger ‘issue’, but that’s just a personal preference i.e. I prefer fixed spreads myself. Of course: with an ECN broker and variable spreads the variable spreads are normally far smaller than the fixed spreads e.g. 0.1 pips on EUR/USD which is great BUT during periods of high volatility that same spread COULD increase to 10 pips (alright maybe an exaggeration but you ‘get the picture’). It depends on your trading system(s) / style really. I only trade long term so spreads are not REALLY an issue for me on anything. But for short term traders (news traders and especially scalpers) they can be an issue and have a material impact on your profitability. All I can tell you is that no matter whether you’re trading with fixed or variable spreads: if you trading from a bid price only chart (like Metatrader’s for instance) you must compensate / include the spread on all ask/buy orders and this, of course, is a lot more difficult to do with variable spreads. The best you can do with variable spreads is to either use the maximum that the spread has EVER been or an average of the variable spread over X number of days (14 or 20 or something else).

Regards,

Dale.