By Darrell Martin
What if you came across a little-known trick that could potentially save you from losing money while trading? You may have just stumbled onto such a thing! Let’s refer to this little-known trick as the bid/offer spread seeker. When you are trading, it is easy to want to hold on to a contract until you have taken all of the life from it and it has nothing left. You might have become greedy and held onto the contract until it has little or no value left in it because you want all the value or profit. When this happens, the contracts available on the other side of your trade drop from 30 to 1 and you can be stuck in your trade.
This means that where there had been 30 contracts available for traders to get you out of your trade, there is now only one contract, which may not be a big deal unless you are trading more than one contract. If you are left holding more than one contract, the price has to move a few ticks before you can get out of your trade, until there are more buyers or sellers to take your contracts from you. If you are waiting for the price to move, you can be losing profit you thought you had made.
If you know about the bid/offer spread seeker, then you can get out right before the price hits. Get in the habit to take profit. This is a good habit to get into now, because eventually everyone will be trading more than one contract.
How Do You Know Where And When Price Will Hit That Point? The point where the contracts drop and you are stuck in your trade is where you want to use the bid/offer spread seeker. Before you can use this trick, you have to figure out the bid/offer spread. Let’s say the bid offer is currently 4285.3/4285.7, with the floor at 4285.0. The spread is the difference between the bid and the offer: 0.3 and 0.7 = 0.4. This is the big key here. Since the bid/offer spread is 0.4, if the offer gets to 4285.4, the bid will be at 4285.0, but quotes cannot be made at the level of the floor. If the price gets down to 4285.0, the offer and bid contracts available which had been at 30 contracts, will turn to zero (0) on the bid side, because there cannot be any quote and it will turn to one (1) contract available on the offer side.
As price comes back up, you’ll probably see one (1) on both sides until the price reaches 4285.8 then the contract quantity available will pop back up to 30 on both sides. The bid/offer price has to approximately double the amount of the bid/offer spread, then the contract availability can increase back up to 30. Since the bid/offer spread was 0.4, the contracts available will go back up to the 30 contracts once the price has increased by approximately eight (8) ticks.
There Is No Rulebook That Says This… But this is huge! You just have to understand the concept of the bid/offer spread seeker. If you don’t, then you can be in the money on your trade and everything is all good. Then, in two seconds, you can be out of the money and stuck. When trading some markets, it can be all of your profits in a heartbeat.
The Magic Formula Is Unknown The magic formula for knowing when contracts reappear for trade again is unknown. It is only approximate. However, you just need to know at what price to expect contracts won’t be available to trade. The bid/offer spread seeker trick is to exit before your offer gets to a price where there is no bid or before your bid gets to a price where there is no offer. By knowing this, you can protect your profits and not be left hanging or stuck in your trade. As stated before, get in the habit to take profit.
To learn other educational tips to help you in trading, go to www.apexinvesting.com, a service of Darrell Martin.