Bid/Ask Strategy

Hello to all at this Forum:

This is my first post as I am new to trading the e-mini. While papertrading I found that too much profit is lost to the bid/ask spread. I use the j-trader platform to trade. The spread is a quarter point. On ten trades the loss to the market is $125.00 if you trade using market orders.

Is there anyway, other than the use of limit orders to buy at the bid and sell at the ask? How can we reduce the loss to the spread?

Thanks for the help.

hi ramesq - welcome to the forum

In general, retail traders tend to use market orders and pay for that conveninece with the bid/ask spread. Most pro's use limit orders to avoid this cost of trading. To answer your question, limit orders is the way to put the spread in your favor.

Depending on the market your trading, and based on your comments I will assume your looking at the ES contract, the ease of limit order fills at the inside bid/ask varies rather significantly. Since the ES has a deep order book, it's often hard to get a fill on limit orders, you are often left feeling like your always 200 contracts away from a fill as you watch the market take off without you. The YM has a thin order book, and thus is usually rather easy to get a small limit order fill. The ER2 is often very fast and trendy in it's moves, so getting a limit filled in the direction of the trend is often very difficult and you will have to pay up and chase price on fast breaks to get in.

The lesson here is to be realistic and really understand the nature of market your going to trade, and plan for how it's nature will affect your trading strategy and results.

Welcome ramesq!

On a slight tangent I've discussed allowing the possibility that the trader determines the price that they bid/ask at up to 100's of a point with the trading platform aggregating the 1/100's bid/asks to 1/10's for ease of viewing.

For example, the market is trading 1311.25 / 1311.50
You want to get long and so enter your bid for 100 contracts at 1311.26. This allows you to jump the line by paying up and giving the seller 1/100 of a point better price. This would obviously be a fairer market but I can't see this sort of thing being implemented by the CME or any other exchange anytime soon.

I know that there are some companies that make a market in the S&P and other indices that will allow you to trade in any size but you are at their mercy with respect to liquidity and clearing security etc.

If your trading strategy has predefined entry points you can enter limit buy orders for going into the trade.

For exiting a trade, especialy with a Stop Loss order, you should use a market order.

The difference between bid and ask is not as important as you think (IMO). Decent money and trade management are (a lot) more important. As a beginner focus on these in stead of trying to squeez the last penny out of each trade (leave that to the pro's).

Not sure if you've read the Bid/Ask Disadvantage article? It shows how much of a disadvantage the bid/ask can be in a strategy.

When exiting a trade on a stop, yes, traders mostly use market orders. There's a neat feature in Ninja Trader that allows you to use a simulated stop. A simulated stop does not issue the market order (from your computer) until the number of contracts bid/asked at your stop price drops below your predefined limit. This means that if the market 1 ticks your stop and then reverses you won't be stopped out. i.e. the market has to trade heavily at this point and flush out most of the contracts to kick you out of the market.

There is a disadvantage to this as well. You are more likely to get slippage if you wait for the number of contracts to dip to that low level before you computer issues the buy/sell market order.

This "stop strategy" can, of course, also be implemented manually by using soft stops and hitting the market order button when the number of contracts at bid/ask drop to a predetermined level.

Good read on Order Flow


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