In the last article, we talked about the stages of development of a trader. The first stage is buying a spread. Not many people are familiar with this strategy. Let’s learn what it is and how you can use it.
Buying spread in its classical meaning is trading the trend line bounces drawing on the DOM at a certain price level. The key idea is to collect the difference between the bid and the ask. Typically, there is a huge spread on non-liquid stocks. For this reason, if you place bids on the ends of the range, they will be executed in the first place. That’s where the trader’s income come from.
However, you ought to have certain reasons to enter the market — be that the DOM that can trigger a bounce, an iceberg order, a level or a trading bot. It’s even better when you have numerous factors at the same time, for instance, the DOM, an iceberg order and a certain level on a trend line. In other words, these factors show the interest of market players to hold the level or the lack of interest to overcome it. This will enable setting a close stop-loss.
How can you find a point in the DOM that will restrain the price? To do this have a look at the Level 1 quotes. What kind of deals prevails — bids or asks? What is their intensity, how do they take turns? In the clusters check the DOM in comparison with the volume traded in the last 20–30 minutes to evaluate for how long the DOM can restrain the price.
This approach will help to enter a deal with a perfect understanding of its baseline and high control of the risks instead of trying to predict market fluctuations.
