I understand what the spread is and I understand why you take into account the spread when calculating your risk to reward ratio but I can NOT understand why the SL and TP are ajusted for the spread
I believe once the SL and TP profit positions have been judged on the charts (due to previous candles, resistance/support etc. etc.) then the SL is increased by a few pips and the TP is reduced by a few pips to allow for the spread. But surely this skews the SL and TP positions?
Now I am sure there is a simple explanation but as hard as I think I just cant get there. I much appreciate anyone who can explain this to me
Nice to know someone new has thought about this!!! It doesnât happen too often.
If youâre working from a BID or SELLING price chart (such as MetaTrader which ONLY shows you the BID or SELLING price): then you should compensate for the spread on any ASK (BUY) order i.e. add the spread to your intended ASK (BUY) order price otherwise you are indeed âskewingâ your SLs and TPs. Think of the spread as an âextensionâ of the price bars shown on the chart. This is a major reason for SLs or TPs being hit prematurely i.e. by not compensating for the spread. But as I say: ONLY if youâre working from a BID or SELLING price chart. Some (mostly proprietary) trading platforms give you the option of showing the charts as BID, MIDDLE, or ASK price charts.
One problem though:
Itâs easy to do this with fixed spreads but with variable spreads itâs not QUITE so easy given that they are variable. So at the time of your placing your SL or TP order the spread may be X but may widen to Y and STILL take out your SL or TP prematurely. For what itâs worth: if Iâm trading anything with variable spreads I tend to DOUBLE the âTarget Spreadâ. Most brokers that offer only variable spreads will normally give you a âTarget Spreadâ which basically is telling what the MINIMUM spread will ever be. So I tend to DOUBLE this MINIMUM spread to give my orders a âfighting chanceâ.
I hope that helps.
And before anybody âcorrectsâ me here and tells me that MetaTrader shows the ASK or BUYING price: NO THE CHARTS DO NOT. You can toggle the ASK PRICE LINE off and on but the bars as shown on the charts are constructed using the BID or SELLING prices only.
Unfortunately: variable spreads CAN be used by unscrupulous brokers to take out SLs by widening the variable spread JUST enough to take out your stop. To make matters worse: you have NO way of tracing how wide the spread ACTUALLY was at any given point in time (well: at this âlevelâ of trading anyway). Thatâs why youâll find thread after thread here where a trader is noting that their SL was taken out but price never went anywhere near the SL price. Or so it would APPEAR when looking at the chart. But normally whatâs happened: the spread has widened and taken out the SL.
Bottom line: itâs important to place your SLs and TPs CORRECTLY. Even at an unscrupulous broker there is only SO much they can do without it being OBVIOUS that theyâre âtaking the pi*sâ out of you.
Thereâs also a thread somewhere around here that I started a while back on this very topic. Iâm not sure if itâs worth the effort of looking it up though i.e. I think Iâve basically âsummed upâ the âgeneral consensusâ of that thread here.
Regards,
Dale.
Edit:
One last thing that I didnât mention and just to be clear. Variable spreads, on a BID price chart, are varied by varying the ASK price. No compensation is necessary for BID prices on a BIG price chart.
Thanks for all the info Dale, I may be getting clearer on this now. Let me check, so although we initially judge our SL and TP inline with the chart (BID price) that we are following, the SL and TP will be hit by the real currency price set by the market and not the BID or ASK that the broker gives?
Due to the lack of posts I would say newbies do not understand the importance of this topic.
And having said that I must be thinking in the wrong direction again, this is my perspective at the moment:
We have judged our entry by the Bid price of a relevant position shown on the charts, therefore if we judge our SL and TP by previous relevant Bid prices the spread is irrelevant.
Also if SL and TP are set at the actual maket price (in between the Bid and Ask) there is a buffer by using the Bid price for the SL and TP ie. the SL would be lower than the market price so wouldnt be stopped out too early and the TP would be lower than the market price so wouldnât be out of reach.
Tell you what: tomorrow Iâll try to track down the thread I started and you can read through that and get some different perspectives. Also: Iâll give you examples of what I mean (or what I do anyway). Only reason I say tomorrow is because itâs nearly midnight here now and Iâm âbushedâ and pretty much âspentâ for the day so I donât want to go typing things that may be full of errors!!! LOL!!!
It was a pretty âpainlessâ excercise i.e. I thought Iâd have a problem finding it because when BabyPips upgraded from the older to the newest version of the vBulletin Forum Software a huge âchunkâ of old threads and posts no longer appear when using the search functions (although the threads and posts are still there but you have to find them manually and thatâs no easy task let me tell you).
Anwway: take a read of that thread. There are examples there already I see. If itâs still not clear: âgive me a shoutâ and Iâll clarify further.
Ok, im half way through the thread Dale but before I go on I need to get something straight so that I can get the right perspective on this.
On MT4 are the SL and TP hit by the BID price? eg. SL is at 1.5045, once the BID price reaches 1.5045 will the SL be actioned. Or are SL and TP hit by a difference price eg. mean of Ask and Bid?
I justed wanted you to know Iâve not forgotten about you nor your query. Believe it or not I started a reply (a nice âjuicy oneâ that explains this whole âthingyâ in detail but Iâm just not getting to finishing it and to make matters worse itâs only a few lines)!!! LOL!!!
Seriously: thereâs a little bit more to this question and Iâm trying to be as detailed as possible because as someone on this thread noted (I THINK it was you or maybe someone else i.e. forgvie my rudeness but I didnât look before posting this) this is not normally something that new traders take into account and itâs a MAJOR reason for SLs being taken out too early, or TPs NOT being hit, etc. So just bear with me a LITTLE while.
For NOW though: the SHORT answer is that you BUY at the ASK price and SELL at the BID price. That sounds simple. Simple that is until you get into the different order types and thatâs what Iâm trying to detail as well âone shotâ.
I look forward to your post but let me just log down what I am thinking right now before I forget.
Buy trade: Buy at the ASK price TP is hit by the BID price SL is hit by the BID price
Sell trade: Sell at the BID price TP is hit by the ASK price SL is hit by the ASK price
If I knew the above to be correct I would be able to visualize the positioning on the charts more accurately and also calculate the risk to reward correctly.
I just got destroyed by SLs triggering but nit TPs on counter tradesâŚ
On the chf last night on my sells the rate went past TP by about 2 pips and stayed there for about 45mins, yet the tps did not execute⌠is this because I was screwed by spread?
Basically ive lost a lot of real money if the rate doesnt drop againâŚ
Yes, screwed by the spread. On a sell trade you are waiting for the Ask price to hit your TP. The chart usually shows the Bid price. Therefore the spread must have been greater than 2 pips at the point the chart (Bid) price went past your TP.
Before entering a trade you should take the spread and add it to you entry, TP and SL areas.
I just got destroyed by SLs triggering but nit TPs on counter tradesâŚ
On the chf last night on my sells the rate went past TP by about 2 pips and stayed there for about 45mins, yet the tps did not execute⌠is this because I was screwed by spread?
Basically ive lost a lot of real money if the rate doesnt drop againâŚ
Try to learn from what the market did during this trade. Keep a journal and note down everything you did to prepare for the trade, print out the chart and study it.
Donât take it personally, the market does what it does, we can only try to limit our losses and maximize our winners. Master the art of money management, so that you never loose a large amount of your investment again.
Next time when you come back you will be better prepared and ready to take that A+ set up that you see, knowing you have done your homework, ready to enter, cool as a cucumber:cool:
Sorry: I should have replied to your post yesterday already but never got around to it.
Before I start:
richhand: Iâm afraid youâre incorrect my good man. If youâre talking about MetaTrader the chart ONLY show the BID/SELL price and NOT the ASK/BUY price (the prices of the bars I mean). You CAN turn the ASK line ON to show you where the ASK price IS but the bars are shown or drawn using ONLY the BID/SELL price. Just bear that in mind.
To answer your question though benjib84:
Yep: you got EITHER screwed by the spread or by your broker (or both). In order for the TP to be executed on s SHORT position the ASK price has to reach your TP NOT the BID price. In other words: even if you were looking at that chart WHEN it happened you would have EXPECTED your TP to executed. But because you cannot see the ASK price on the chart you would not have been able to see whether the ASK price had reached or exceeded your TP price. You would only have seen the BID price move past your TP price. Unless you had (as noted above) the ASK line showing. And this of course is ONE of the problems when dealing with variable spread which has become the norm in the industry (well at most brokers anyway). At a reputable broker: once the ASK price had hit your TP it would have been executed. But Iâve seen cases (and had it happen to to me at my first âlowlife bucketshop bottom feeder scam brokerâ) where EVEN ALTHOUGH THE ASK PRICE has reached or surpassed your TP price (using your trade as an example) then the broker will simply âignoreâ this UNLESS the ASK price moves SO far through your TP that they cannot âcover their tracksâ. At a broker of âill reputeâ: if the ASK price moved through your TP for an instant or two and then price turned up your order would not have been executed and simply âforgotten aboutâ (conveniently) and, well, as happened to you, you eventually got stopped out at a loss!!!
Donât take it personally, the market does what it does, we can only try to limit our losses and maximize our winners.
Well scratch that! If the brokers are at fault, then you may have a âlowlife bucketshop bottom feeder scam brokerâ that SUX!
Yeh: Iâve been trying to think of an âacronymâ for those types of brokers!!! LOL!!! Every time I mention them in a post the âdescriptionâ seems to get longer!!! LOL!!!
Unfortunately: it can and does happen. And when youâre a new trader with little experience: they are SOOO good at âcovering their tracksâ that YOU start thinking to YOURSELF that there is something wrong with YOU!!! And those very same brokers will ALWAYS have an âexcuseâ or âreasonable explanationâ. Iâm sure youâve heard the saying: âbullsh*t baffles brainsâ!!! Well thatâs what those types of brokers rely on!!! Iâll GUARANTEE YOU EVERYTHING I HAVE: if benjib384 had called his broker and asked them âwhy was my TP not executedâ that the answer would have been âsorry sir but the spread had widenedâ. And the same would apply if a stop loss was executed on a short trade and price APPEARED to be NOWHERE NEAR. âSorry sir: but the spread had widenedâ!!! Yeh: by JUST enough to catch your stop. Funny that. And THE WORST part: there is NO WAY of YOUR proving or disproving otherwise because with variable spreads YOU just do not HAVE the data at hand for that particular moment in time.
So yeh: your choice of broker can play a HUGE part in your success or failure. And of the, what, over 2 400 broker reviews and ratings on Forex Peace Army alone, thereâs probably four, maybe five, that donât âpull movesâ such as noted above. Bear in mind though: spreads widening is ânormal practiseâ. But there is âwideningâ and then there is âWIDENINGâ if you âget my driftâ.
Actually: THEREâS a âprojectâ for some MetaTrader âcoding expertâ!!! Write an EA that simply records and logs the date, time, and the BID less the ASK difference for every tick!!! At least THAT way: the trader will have PROOF (not sure how much good it will be when having this argument with a broker but could be interesting nevertheless).
Bravo, Dale, for this excellent post. Iâve been wracking my brain over this very issue, even after reading this excellent article by The Forex Guy but I do have a question. You wrote, âadd the spread to your intended ASK (BUY) order price otherwise you are indeed âskewingâ your SLs and TPsâ - but arenât the SL and TP placements independent of where you place the Buy entry?
Guess what! I think Iâve got it! If you want the SL to be 40 pips beyond the entry price, then it is DIRECTLY TIED INTO where the entry price is.
