Using Limit Orders as a Weapon

Using Limit Orders as a Weapon

Aug. 9, 2023

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I’ve always said the best trading system I’ve ever seen–by me or anyone else–is the Hornet.

And, not surprisingly, the best big portfolio I’ve ever seen is also the Hornet.

Yet, I haven’t been trading the Hornet for years. (Until recently.)

Why?

Because of the nefarious spread-widening experienced with brokers in the U.S. Is it actually nefarious? Probably not.

But the sudden spread-widening is why I stopped trading the Hornet.

If you’re looking for, say, a 15-pip target and the spread widens to 15 pips, a nice winning trade turns into nothing.

If this rarely happens, no big deal.

If it happens a lot, a great system becomes unusable.

Is there anything we can do?

Yes.

We can use a brand new version of the Hornet that uses Limit orders to enter instead of market orders.

What’s the advantage?

Market orders are victims to whatever the spread decides to be at that particular moment. It’s like surge pricing on Uber.

But Limit orders are unrelenting. With a Limit order, you get that price no matter what.

So why not always use Limit orders?

In theory, everyone should always use Limit orders.

In real life, there’s a problem.

Because if the spreads do their magical widening trick, we won’t get filled on our trade. The Limit order will fight for our price, but the spread makes it so that we never get our price.

And so the trade moves on without us.

Which, of course, makes the testing a bit suspect. A backtester will assume the Limit order got filled. We’ll never know if we would’ve actually been filled or not.

So, what do we do?

We could just cross our fingers and hope our trades get filled most of the time. If they do, we could do very well.

Let’s be optimistic and take a look at the same portfolio as last time on the New Hornet with Limit Order. If we traded 1 lot each time on the EURJPY, NZDJPY, USDJPY, CADJPY, CHFJPY, GBPJPY, EURUSD, and AUDCAD, here’s what we might have gotten in 2023:

On a hypothetical $10k account, that’s excellent. And it also did well in July when the Banks of England and Japan played their fun rate-announcement games.

In short, if the Limit orders actually get filled in real life, we might have solved the problem of rogue spreads.

Is there anything else we can do to combat market environments that seem to be very unfriendly?

Yes.

And we’ll talk about that in the next Newsletter.

 

 

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.