Mechanics and Dynamics of Charting
We soon find out that we bought in at $10.20, that is, at the ask price. Again, we
encountered the problem of the expensive longs. This occurred because the very
moment the market order was filled, the ask price was $0.20 above the support
level as viewed on a bid‐priced chart.
Assume now that we placed a pending order to buy in at $10. We soon find
out that we were filled at exactly $10, that is, at the ask price that we had original-
ly intended to be filled at in the market. Unfortunately, when we were filled at $10,
the bid price was already below the support level, at $9.80, as viewed on the bid‐
priced chart. This means that we bought into a support level after it was already
breached! This is referred to as the problem of the late longs. See Figure 3.26.
The bid‐ask spread also affects the reward‐to‐risk ratios. The spread:■ (^) Increases the probability of exiting at the stoploss (loss promoting)
■ (^) Reduces the probability of exiting at the profit (profit restricting)
With market orders, the spread is deducted from the profit and added to the
loss, which is reflected in the trading account. In Figure 3.27, a trader buys when
the bid price was at $1. Since the bid‐ask spread was $0.20, the trader went long
at $1.20. With a profit target at $1.50, the maximum profit would be $0.30,
instead of $0.50. But for a stopsize of $0.50, the maximum would be $0.70, in-
stead of $0.50. Hence the actual spread‐adjusted reward to risk ratio (R/r ratio) is
figure 3.25 Going Long at the Breakout.
figure 3.26 Going Long at Support.