What is a Forex Spread in Trading (Part 6 : Ending)

Previous part :https://cutt.ly/pjId3rY

Why it is important to know the value of spread in trading ？

Each trader has a different degree of sensitivity to the cost of spread. Your degree of sensitivity to the cost of spread should depend on the trading strategy you use. The lower the timescale you trade on and the larger your number of transactions, the more vigilant you need to be about the spread size.

If you are a Swing trader looking to accumulate a large number of pips over weeks or even months, the spread size affects you only slightly compared to the movement size that you sought. But if you are a Day trader or a Scalper, the spread size can make all the difference between your losses and profits.

If you regularly enter and exit the market, the transaction costs may add up. If this is your trading strategy, you should make sure to place your orders at times when the spread size is optimal.

It is generally a good idea to combine indicators. So use one or more other indicators to confirm the signals obtained by your main indicator. A spread indicator can be used as a last filter to enter the market, and make sure you don't enter a position at a sub-optimal time.

Note that this will not be useful for every trader: if you are using a strategy that causes you to open few positions, you will be unlikely to want to add a filter that excludes opening positions in the event of a spread above the average. On the other hand, if you have a strategy with a high frequency of opening positions that aims to gain a few pips, it can be vitally important to avoid placing an order when the spread is unusually high.

You could adopt a short-term trading strategy, analyzing an hourly chart and selling if the market hits the upper bound or buying if the market hits the lower band. Then you can apply a filter to improve the performance of this first indicator.

Let's say you look at a 100 moving average and a 25 moving average, and use them to set the underlying trend. If the fast moving average (25 MA) is lower than the long moving average (100 MA), it indicates a downtrend. If the fast moving average is higher than the long moving average, it indicates an uptrend.

You follow the signals of your primary indicator, but enter a position only if the signal is in the direction of the underlying trend. The filter now only allows you to position buy if the fast moving average is above the long moving average, or sell if the fast moving average is lower than the long moving average.

As a definitive confirmation signal for entering a position, you can use the spread indicator. You can go back the history of spread to identify the time slots with the highest spreads. This will allow you to avoid trading during these time slots when the spread is unusually high. Instead, you trade during times when the spread is at its mid-level or below that level.

Of course, the example explained above should be taken as an illustration of the use of spread indicator rather than as a trading strategy. Before using a trading strategy, it should always be tested in a risk-free environment, such as on demo accounts.

(End.)