Overcoming Large Bid-Ask Spreads for Futures with TradersPost
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To manage large bid-ask spreads in futures trading, use limit orders to control entry prices, but be aware of the risk of incomplete fills. Market orders guarantee entry but can be costly due to slippage.
Large bid-ask spreads in futures trading, such as with natural gas contracts, can significantly impact short-term traders due to the extra cost incurred when entering positions. Here’s how to manage and mitigate this issue when using TradersPost for automated trades.
The Problem with Large Spreads
The bid-ask spread represents the difference between the lowest price someone is willing to sell at and the highest price someone is willing to buy at. In futures markets like natural gas, these spreads can be wide, meaning traders might pay more to enter a position than expected, adding to slippage.
How to Mitigate the Issue:
1. Use Limit Orders: One way to avoid the negative impact of large bid-ask spreads is by placing limit orders. This allows you to specify the price at which you want to enter, helping you avoid overpaying due to a wide spread. However, this comes with the risk that your order might not be filled if the market doesn’t hit your price.
2. Market Orders and Slippage: If you place a market order, you’ll get filled at the available price, but it may be significantly higher or lower due to the spread. Make sure to account for slippage in your strategy, especially when trading in markets known for large spreads.
3. Trade-Off Between Market and Limit Orders: Limit orders give you control over your entry price but may result in incomplete fills, while market orders ensure entry but at a potential cost. Traders need to weigh these trade-offs based on their strategy’s timeframe and risk tolerance.
4. Multi-Order Strategies: You can set multiple limit orders at different price levels within the same subscription, adjusting your entries dynamically. For example, if you expect the price to drop, setting multiple lower limit orders can result in better average pricing if filled, though unfilled orders will need to be canceled manually.
Conclusion
Managing large bid-ask spreads in futures trading requires careful consideration of limit orders versus market orders. Limit orders provide more control but come with the risk of incomplete fills, while market orders ensure execution but may result in higher costs. Building logic into your strategy to handle these scenarios can help improve trading efficiency.