Understanding Entry Price Difference

When you are new to trading, things can be confusing. Some of the basic things you learn, can be hard to understand. You may have read several books or listened to countless webinars thinking that you have got it down, only to discover that somewhere along the way, you missed something. A basic component of entering or exiting a trade was lost on you.

This recently happened to a trader. He was watching his charts, saw an opportunity for a trade, opened a ticket and entered the trade, only to find that it was not performing the way he had expected. He thought about it and realized he was missing something, so he asked for help.

This is a very important step. Many traders get into trouble because they will not ask for help. They try to figure it out on their own. If you are man (or woman) enough to admit that you do not know everything, then you open yourself up to learn.

In looking at his chart, he said, he had “entered on the 1572 bar and got an execution of 1574.” He went on to say that he was not showing a profit and that had he been filled at 1572, he would be showing a small profit.

This scenario has many teaching points. “Entering on a bar” does not mean this is where the price will be. Although, when learning a strategy it may be stated to enter on the bar, you cannot do that. You can make an entry when you see the bar reach a certain price, but however you place your trades, i.e. tickets, DOM, ATM or using a broker, you cannot enter on a bar.

The chart price is not the same as the indicative price. If the strategy you are applying says to enter when a pattern forms or at the next bar, that is not the price at which you will be filled. This is the signal to place your trade. The bid/offer price is determined by the underlying market price, which also determines the indicative price. This will correlates with the bid and offer prices you will see on your order tickets.

Bid and offer are slightly different if you are trading binary options or spreads.

Spreads
In the scenario above, if the trader wanted to go long or buy at 1572, the indicative index may have been at that level, but the offer price may not. Therefore, the contract would have filled at the best available offer price on Nadex, which in this example was 1574. If the offer price was 1574, you can safely assume the bid price was lower and that would account for the loss noticed on profit/loss (P/L). As an example, let’s assume the bid price was 1570. If you wanted to exit the trade immediately and the market did not move, you would have had a loss of $4 as 1570 would have been the exit price.

Binary Options
Examining the scenario again but trading binaries, if the trader wanted to go long or buy a binary strike at 1572, the price would be around 50, a little higher for the offer and a little lower for the bid. If you are only paying attention to your charts, there might not have been a strike price right at 1572. But perhaps there was one at 1574.

The difference between the bid price and the offer price would explain how you would see a loss on the profit/loss (P/L) column on Nadex.

Let’s say you were able to enter a buy contract on the >1574 3PM binary at the offer of 55. The current bid price is 47. Again, if the market does not move, and you want to exit the trade immediately, you would incur an $8 loss, the difference between the offer and the bid price. If there is movement, the loss could be more or less. As time goes on, the market will move and the prices will change. The value of the strike will go up and down until expiration is reached. At that time, the contract will settle.

Summary
Remember, prices can quickly change even as you are waiting for a ticket to come up on your screen or from the time you hit the place order button. This can cause your order to be filled at a price different from the price you submitted. The difference between bid and offer will always reveal a loss, as the two prices cannot be the same. The price you see on your chart is not always the same as the indicative price or the bid/offer prices. And, asking for help is a good thing to do.

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