≈ TheBid/Ask Illusion≈
You ever notice when you’re going through your weekly routine that some things just don’t look right? Let’s paint a picture here, its Sunday evening and you are jacked about the opportunities that the coming trading week may have in store for us because after all you are a trader and that’s where the fun is. You may be running through the futures charts trying to get a glimpse into what Monday mornings open might look like or you may be running down the sectors to see which ones show promise for the coming week. It doesn’t matter where you are in your process you at some point will be looking at the spread to determine where to put the orders in at. This is where the best laid plans of mice, men and traders can go awry.
A lot of the retail traders like to set up trades when the markets are closed. This is generally a good idea because when the markets are closed and the prices are not flying around then it is typically easier to control one’s emotions. This is where a problem can present itself. The problem that we face is trying to set up orders with the bid/ask spreads that we are seeing because they can change between Sunday evening and Monday morning. The market makers always widen spreads before the weekend due to low volatility and increased risk for themselves. The lack of liquidity that we see is the reason for the widening of the spread and you will see with very illiquid stocks that the bid/ask will be extremely wide as this is how a market maker is compensated.
For us the bid and ask prices we see on Sunday evenings will not always change on Monday morning unless the overnight futures trading makes it happen and this is where we can see a gap. So, setting up trades when the markets are closed is a good idea but building into a review period just before market opening can result in better fill prices as well as getting you into trades that you might have otherwise missed out at the bid/ask spread you built the trade on.
This bid/ask illusion is not usually an issue for most traders especially if you are using stop limit type orders to enter trades but in times of increased volatility you may find you are not getting into the trades you are hoping for and in these types of conditions it is wise to build in this review process to your routines.
Chart of the Day
Gold Futures (Ticker: /GC) The gold futures are making inroads into recovering after an 8-month downtrend. This commodity has made the turn and is putting in a series of higher highs and higher lows. This will not be a straight shot back to all time highs but after breaking recent resistance levels it is showing some solid strength.
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