tactical trader

Ask any professional trader about the things that matter to them most in their trading and the chances are that one of the most popular responses will include reference to spreads.

Cost control in trading is critical to year on year increases in profitability and one of the major charges that will eat into this profitability is the spread, the difference between what you are expected to pay and what you will get for what you are selling.

In my experience most investors are pretty lazy where spreads are concerned, mainly based on the belief that there is very little they can do other than pay them. They convince themselves that over time, if they have bought wisely, the spread will become very insignificant when compared to the growth they will enjoy.

This may well be true but think of it another way, imagine you make just one trade each month and it involves buying 5000 shares at £3.00 each. If you could get these shares for just one penny less than the ‘sticker price’ then you will save £50. Do this each month and by the end of your first year your savings will be a very healthy £600, reinvest this and the results are even more dramatic.

This £600 should be in your pocket, not the pocket of your broker. Think about this, you probably shop around for cheaper petrol or go online to save money on a holiday and yet here you are actually giving money away. It simply does not add up.

Until relatively recently there was very little you could do about this but in line with the rapid advances in electronic trading the data that will give you the opportunity to get these price improvements is readily available. Sometimes you will have to pay to get it although in the majority of cases it is rolled up into the service provided by your broker. Generally the data is referred to as Level 2 and you are going to hear more and more about it as it gains in popularity.

One of the most exciting things about Level 2 is that you can use the information to help you trade using what is generally called ‘direct access’. In very simple terms this means that instead of asking someone for a price for the shares you want to buy and then being forced to accept this you can place your own orders directly at the exchange on what is known as the order book. This order is placed at the price you want to pay which brings considerable advantages over the more traditional methods you will be familiar with.