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Buying the Ask; Selling the Bid - better than placing Market orders?
Most platforms provide the option (via key combo or button) to buy at the ask (for long entries) or sell at the bid (for shorts). I think I know what this does and I believe it's got a potentially big benefit - I'm looking for confirmation/feedback on this. I believe it nabs the nearest/best/closest price to your desired entry, and does so as a limit order - the benefit of course being that there's no slippage. Ever. Is this true? I've been using this technique in NT (using Ctrl or Shift keys on the DOM). Occasionally my order gets left behind, but this is preferable to getting hosed on slippage.
If you buy the ask, this is a limit order at the best ask price. The price is guaranteed, but there is a risk of not getting filled. This is true for all limit orders.
To understand why there is a risk of not getting filled consider the following times:
t1 : time at which the snapshot of the order book is taken
t2 : time at which that snapshot is displayed by your trading software
t3 : time at which you execute your order
t4: time at which your order has been routed to the exchange and hits the order book
Even if you execute automatically, the time interval t4 - t1 may exceed a few hundred msec. During this time the market may have moved away from the previous best bid and best ask, and you may not get filled. With a market order you have a guarantee to get filled, but may experience a larger slippage.
These are not your only options to execute a buy order, actually you can
-> buy the market (fill guaranteed, highest risk of slippage)
-> buy the bid or below the bid (no slippage, highest risk of not getting filed)
-> buy the ask (you lose the spread but will not have any further slippage, high probability of getting filled but no gurantee)
-> buy above the ask (marketable limit order, you define the maximum amount of slippage that you are willing to accept in order to get filled)
There is no general rule, which of the previous order types is the best choice. It really depends on your setups.
If you have the chance not to be filled immediatly but just after your limit order is placed in a such a way, it seems you'd also get rebates from providing liquity on exchanges like Chi-X or liquidity providers such as MBT ?
Although not the initial point, it might turn randomly in an advantage
I trade the Hang Seng index which is very volatile and larger spread between the bid/ask. You must be cautious when buying the ask price....since, by the time you enter the order the bid/ask could have jumped considerably and you get a lousy fill price (certainly not what you had intended). Buying the bid is much safer but it does not guarantee a fill....I have placed orders to buy the bid and it becomes a limit order at the current bid price...but, the market can move away from you and leave you in the dust. So, buy the ask will get you in the market much more often but you pay the price by a worse fill. Always a catch....
The green ADX is just an extra cherry on the top. If everything is lined up make an entry. I use the DOM for entries by placing my order 1 tick Below/above the "last trade" which in my case in yellow.
This will get you into the trade at the price you wanted, and only give up 1 tick.
Buying the ask becomes a limit order at the current ask, whatever that ask currently is. If you are unlucky, the current ask moves while you are entering your order.
To avoid this place your limit order directly at any price on the DOM. As @perryg said, that limit price can be above or below the current ask or bid.
If you are using an execution intensive methodology, i.e., scalping, then you should be trading as liquid an instrument as possible, in order to minimize liquidity risk. If you are trading an illiquid market where there is inherent liquidity risk and slippage, you can mitigate it's effects by extending your time-frame, risk-reward parameters, and scaling your entries and exits.
Thanks for all the feedback. Some very good points were brought up.
Tigertrader, your response addresses the critical questions of timescale and liquidity. Of course the entry technique needs to match the trade type, and I neglected to mention this in my original post. I'm scalping the TF, 6E and CL during the first couple of hours after the open. Entry speed and precision is key, and frequently needs to be done on the fly.
At this time, these markets are all pretty liquid and have narrow spreads (usually). My objective (in buying the ask and selling the bid) is to get into a position quickly, on the fly, when I feel the market is right were I want it, all the while eliminating slippage. (I've been subjected to pretty bad slippage - I've seen up to 6 ticks on TOS.)
When I hit the button, I want my order filled within one or two ticks. Were I to buy the Bid (or sell the Ask), I'd have to wait for price to improve. In a scalp, this may not happen (in fact I'm expecting and hoping that it WON'T happen). Buying the Ask (or Selling the Bid) means that there are sellers (or buyers) right now at the price I'm placing my order. I don't mind sacrificing a couple of ticks (the spread) for a likely immediate fill.
If I miss a trade because other orders ate up the inventory at my price, so be it. I'd rather miss the trade than subject myself to the greed of the market maker lining his pockets by providing horrible fills on market orders.
