A good trade not to make

Hi Bella,

I’ve been trading for about 5 months now. I read the SMB blog regularly and appreciate all SMB does to help developing traders.

One issue I’ve come across in my trading is entering into trades of stocks with large spreads. I was watching COO on 12/9/2011. The stock had gaped up on the open. I tried to enter a long position above 64 but the bid/ask spread varied from 10-.20 cents. I didn’t want to pay across the spread and if I got into the position I wasn’t sure if I could control my risk. The stock was gaping over prices and it was hard to judge where I could get out of the position if it went against me. I didn’t place the trade and eventually moved on from COO. Do you have any advice on how to enter into trades with large spreads? I’d appreciate any insight.

Bella

You did the right thing. Very well done. If you cannot control your risk then you cannot make the trade. Your job as a trader is to control your risk, not to make money.

Have said that it could be that your bidding skills need some work. If I do not want to pay the spread in a stock I will bid, listen to the bidding higher clock in my head, and if I do not get hit after a time period I sense I should, then I may bid higher. Then I start that bidding higher clock in my head. If I am not hit on the bid after the time I think I should, then I bid higher but lower than my predetermined high bid limit. I may have to run through this bidding higher strategy five times before I get hit or let the stock run without me.

Let me be clear, I will bid only as high as the trade is still a good risk/reward trade. If I estimate that the stock can run another point if I get hit on the bid, then I allow a bid up to 20c and I allow a paid offer up to 20c. Obviously I want to get the stock at the best price. So I start on the bid and then use my trading skills to get the stock at the best price. Every set up is a little different as to how and where I will bid. This is a function of screen time, trading experience.

I hope that helps. Feel free to follow up with a further question.

Bella
One Good Trade