1/16 Makes all the Difference

Good execution means getting a trade done at the best price once the decision to do the trade has been made. The key to good execution has everything to do with overcoming or reducing the adverse impact of the bid/ask spread. As we pointed out before, the typical bid/ask spread of 1/8 will take away about 30% of the capital from a frequent trader who trades 125 times a year. Currently, many stocks trade at bid/ask spreads of 1/16 or even lower. Online traders can often get trades done at this advantageous bid/ask spread cost of 1/16.

Experienced traders who consistently use the right tools to analyze the market and individual stocks can usually make good trading decisions that give them an insider's edge. According to our extensive historical tests, consistently applying good trading strategies such as those offered by Tradetrek.com (recall the explanations above of Triangle Break Out, Cup-With-A-Handle, and Market Neutral Pairtrades), can generate a return of 30% to 80% a year, before bid/ask spread costs. In reality, due to all kinds of uncertainties and inconsistent application of trading rules, it is difficult for most traders to gain an edge that consistently translates into a 30% return per year on trading capital before taking into account bid/ask spread costs. Recall that such 30% gains cannot even cover transaction costs. This explains why, in many cases, traders lose money. However, by reducing the bid/ask spread cost to 1/16 in every trade, the trader can then cut the 30% per-year transaction costs down to 15%, turning a losing year into a winning year! You can see, then, that reducing the bid/ask spread to 1/16 can really make all the difference between gaining and losing portfolio value.

How can we consistently get the bid/ask spread down to 1/16? Here are some trading tips:

• Avoid trading stocks with prices lower than $10.
• Only trade liquid stocks that almost always trade at 1/8 bid/ask spread or better.
• When you buy a stock, always use Limit Order and set the limit price equal to the bid price, or the bid price plus 1/16.
• When you short sell a stock, always use Limit Order and set the limit price equal to the ask price, or the ask price minus 1/16.
• When you sell your existing stock, use Limit Order to sell it at the bid price, or at bid price plus 1/16 to increase the chance of getting the trade done.
• When you buy a stock to cover your existing short position, use Limit Order to buy it at the ask price, or at ask price minus 1/16 to increase the chance of getting the trade done.
• For all stop loss orders, use Stop Market Orders with stop prices equal to your cut-loss level.