The Effect of Spread

[Jack Hughes]

Been thinking about the real effect of spread on trading. For instance, SB providers generally offer between 2 and 4pt spread on Dow cash. Assuming no slippage or other funny business(!), how much difference does that make to the outcome of a trade?

On the face of it, you might think that a change from 2pt to 4pt just means you have to make a couple more points before you're in profit, but this is only really true on long-term trades. Short term, I tend to think that doubling the spread effectively makes it at least four times less likely you'll make a profit.

Theories welcome.

 

[Technically Fundamental]

My entry timing being off killed my account. I couldn't afford to cut and run because the spread was too large (or I was trading too large) for my account size.
Being in a position to have to keep these losing trades running wasn't good for me mentally. I'm out now until I can really afford to trade.

 

[stevespray]

Been thinking about the real effect of spread on trading. For instance, SB providers generally offer between 2 and 4pt spread on Dow cash. Assuming no slippage or other funny business(!), how much difference does that make to the outcome of a trade?

On the face of it, you might think that a change from 2pt to 4pt just means you have to make a couple more points before you're in profit, but this is only really true on long-term trades. Short term, I tend to think that doubling the spread effectively makes it at least four times less likely you'll make a profit.

Theories welcome.

You're right in calling it 'a theory';

You have to consider the spread as the cost of trading. As such you need to think of the cost as a percentage of the deal in terms of its target and stop. If you trade dow futures and you target is generally a few hundred points then an extra 2 points is not going to have too much effect. If however you are looking for less than 20 or 30 points then the spread has a big effect since the spread is now more than 10% of the overall trade. In all trades you need a proven edge to overcome not only the market but also the spread.

Steve.

 

[Jack Hughes]

You're right in calling it 'a theory';

You have to consider the spread as the cost of trading. As such you need to think of the cost as a percentage of the deal in terms of its target and stop. If you trade dow futures and you target is generally a few hundred points then an extra 2 points is not going to have too much effect. If however you are looking for less than 20 or 30 points then the spread has a big effect since the spread is now more than 10% of the overall trade. In all trades you need a proven edge to overcome not only the market but also the spread.

Steve.

Yes, Steve, I'm talking about less that 30pt. The reason I've been thinking about this is in relation to Prospreads, which has a terrifically fast platform making it ideal for short-term trades. Unfortunately, you start with a 5pt minimum spread on YM, which in practice is nothing like a 1pt spread plus commission, as per futures broker, even if you factor in the possibility of buying/selling at bid/offer and effectively get zero market spread.

 

[stevespray]

5 points is far to wide and you'll get eaten alive if you are looking to pick off 30's or less. Why not just use a normal SB platform with a 2 spread? You aren't going to get much tighter than that all things considered.

Steve.

 

[Splitlink]

Been thinking about the real effect of spread on trading. For instance, SB providers generally offer between 2 and 4pt spread on Dow cash. Assuming no slippage or other funny business(!), how much difference does that make to the outcome of a trade?

On the face of it, you might think that a change from 2pt to 4pt just means you have to make a couple more points before you're in profit, but this is only really true on long-term trades. Short term, I tend to think that doubling the spread effectively makes it at least four times less likely you'll make a profit.

Theories welcome.

The dow is a powerful mover and with 4 points spread it is more than possible to make a profit. However, why do it? Go for the 2 point spread, it makes life easier.

Some are go going to say "Go to a broker!", but I have read enough of that old chestnut so

"Everyone does what he likes!! "

 

[Jack Hughes]

5 points is far to wide and you'll get eaten alive if you are looking to pick off 30's or less. Why not just use a normal SB platform with a 2 spread? You aren't going to get much tighter than that all things considered.

Steve.

I think anyone who makes lots of short-term trades gets eaten alive with normal spread betting outfits, even if they claim to give 2pt on Dow, 1pt on FTSE and DAX, etc, hence the Prospreads route. Trouble is that to make it work I think you'd need to make 200 trades as quickly as possible every month to get to the half spreads stage.

 

[Splitlink]

I think anyone who makes lots of short-term trades gets eaten alive with normal spread betting outfits, even if they claim to give 2pt on Dow, 1pt on FTSE and DAX, etc, hence the Prospreads route. Trouble is that to make it work I think you'd need to make 200 trades as quickly as possible every month to get to the half spreads stage.

That's not so but, as I said before, don't give away more than you need. However, I get 2 points on Footsie, not 1, as you suggest, and I trade comfortably with that. On bad days I do four trades but my aim is for one within a six hour daily session. Sometimes I get that, most times I don't.

 

[timsk]

I think anyone who makes lots of short-term trades gets eaten alive with normal spread betting outfits, even if they claim to give 2pt on Dow, 1pt on FTSE and DAX, etc, hence the Prospreads route.

Jack,
I've looked into ProSpreads and, as good as they are, they don't stack up too well against a good DA broker. Remember that the spreads they quote are not inclusive of the spread in the underlying instrument which must be added to their quoted spread. True enough, this is often only 1 point in the case of index futures but, if you think of it in percentage terms, this makes a huge difference. Going from 2 pts to 3 pts is a 50% increase which could impact heavily on your P&L.
Tim.

 

[gle101]

I think anyone who makes lots of short-term trades gets eaten alive with normal spread betting outfits, even if they claim to give 2pt on Dow, 1pt on FTSE and DAX, etc, hence the Prospreads route. Trouble is that to make it work I think you'd need to make 200 trades as quickly as possible every month to get to the half spreads stage.

Why should you be forced to make excessive numbers of trades in order to get a good spread? If you trade bigger stakes on some instrument I think it is better to trade DMA through a broker like IB. SB has its place, but not if bigger sums of money is at stake. Small stakes through a SB like Dealingdesk is quite OK by me.

 

[tar]

Why should you be forced to make excessive numbers of trades in order to get a good spread? If you trade bigger stakes on some instrument I think it is better to trade DMA through a broker like IB. SB has its place, but not if bigger sums of money is at stake. Small stakes through a SB like Dealingdesk is quite OK by me.

Exactly if u want to trade big like this guy in the youtube video u should go with a broker like IB for example

YouTube - 05-08-2009 (b) * Making BIG MONEY on Emini S&P Futures * WATCH NOW! Day Trading * Extreme Trader

And regaring the commissions prospreads is expensive even for active traders , IB offer the mini dow for 4.26 $ RT = less than 1 point .

 

[gle101]

Exactly if u want to trade big like this guy in the youtube video u should go with a broker like IB for example

YouTube - 05-08-2009 (b) * Making BIG MONEY on Emini S&P Futures * WATCH NOW! Day Trading * Extreme Trader

And regaring the commissions prospreads is expensive even for active traders , IB offer the mini dow for 4.26 $ RT = less than 1 point .

Although, I doubt very much it is a real trade. Trading GFT and Dealingdesk you get 2 spread (on the rolling daily, the movement not exatly the same as the YM future). This is quite good trading small stakes. I am all for SB, but has never understood SB traders putting big money on the table, with all the uncertainties involved. I notice this is a ES future trade.

 

[tar]

Although, I doubt very much it is a real trade. Trading GFT and Dealingdesk you get 2 spread (on the rolling daily, the movement not exatly the same as the YM future). This is quite good trading small stakes. I am all for SB, but has never understood SB traders putting big money on the table, with all the uncertainties involved. I notice this is a ES future trade.

yeah this is ES , yeah maybe it is demo but it is still considered medium size not big , but there is much bigger trades out there in indices cannot be done with marketmakers like gft and DD even they offer 2 point spread , check tradersaudio u will hear in the pit 100 - 300 big lots trades and sometimes thousands , 1 lot in the pit = 5 emini = 250 $ per handle ...

 

[gle101]

yeah this is ES , yeah maybe it is demo but it is still considered medium size not big , but there is much bigger trades out there in indices cannot be done with marketmakers like gft and DD even they offer 2 point spread , check tradersaudio u will hear in the pit 100 - 300 big lots trades and sometimes thousands , 1 lot in the pit = 5 emini = 250 $ per handle ...

Yes I agree, these sizes is not suited to be traded at SB.

 

[lancenicolase]

It really depends on how often you trade as some spread betters make more than 20 trades a day, thus benifiting from very small price movements and for them 2pts and 4pts spread is a huge difference. So you realise how often you'll be trading and if you will hold your positions for more than a day than I'd go for broker reputation rather than spreads.