Question about broker spread and risk management

Hi,

Say if you had a strategy for example where you planned to TP at 10 pips, when backtesting should you actually be 'drawing' 13/14 pips to account for broker spread? Because it's going to buy/sell higher/lower and sell/buy lower/higher right, by 1/2 pips each way?

And does it also mean that if your stop loss is set to 10 pips realistically your stop loss is actually 8 pips? Just a bit confused

If your plan is to get 10 pips daily and this is your MM plan and the broker's spread is 2 pips (for the sake of example):

- if you are making 1 transaction (sell or buy) then you should earn 10 pips + spread = 12 pips to bag 10pips to your account
- if you are making , let's say, 2 transactions to get 10 pips (5 pips each), then you should take into account the spread, which will be 5 pips + 2 pips = 7 pips EACH transaction you make


Let's say you have a planned stop loss of 10 pips and your transaction went bad (you lost), then you lose 10 pips + spread = 12 pips

If you need clearer explanation please let me know.

Have a good one!

Hi Sawell,

So the thing you have to consider is that in your trading platform you usually see only the chart relative to one of the two bid and ask prices.

While these two are very similar, they always differ from each other, and the difference is what we call the spread.

The ask price represents the best price the sellers are willing to sell, so it's the best price you can buy at.
the bid price represents the best price the buyers are willing to buy, so it's the best price you can sell at.

When you place a buy order, the price is always matched against the ask price, while when you place a sell order, it's price is always matched against the bid price.

Because you generally see only one of the two charts, it doesn't mean you can forget the fact that there are two distinct prices for the two operations, buy and sell.

One (messy) option would be to place buy orders looking at the ask chart, and to place sell orders looking at the bid chart. this is messy, because you'd be looking at two charts.

A more used option is to place all your orders using one of the charts (generally the bid chart), and correct all your buy orders to take into consideration the spread. so by getting the price a little bit higher.

In a Long trade, your entries are buy orders, your exits (stop loss and take profit) are sell orders. In such trades it may happen, if your levels are very tight, that the bid price, goes below your entry level, but the ask price doesn't. As a result you will see in the chart the price having touched your entry level line, but your order not being filled.
To avoid such case you could decide to raise a bit the entry level price, so to increase the chances of being filled. Be careful with doing so because this is increasing your risk.

In a Short trade, your entries are sell orders, while your exits are buy orders. In such cases, when your stop loss is strategically placed, it may happen that once your entry is filled and you are in the trade. The price just tips high and then goes in your direction. If the tip high is within your If the price goes too much against you, it may happen that you get stopped out too early, so you may want to add the spread to your level to avoid this.

While in the Long case you risk not to enter a trade, in the Short case your risk is to lose money. For this reason I would consider adding the spread to the stop loss in a short trade, somewhat more compelling.

I hope this helps,
Giulio