Best Trading Strategy: LTP vs Bid/Ask Trigger

The best trading strategy requires best signal generation logic as well as the best execution logic. One of the most underestimated trading concepts is using bid/ask prices to trigger trades. Trigger may be for fresh entry, stop loss or profit target. Professionals use bid/ask triggers ONLY because it greatly increases profits (especially for short-term trades).


Why Triggers Are Most Important Part of a Strategy

Every trade has two essential steps- Entry and Exit. These may further invoilve sub-steps as per Entry and Exit conditions.  Let us take the discussion using a common example: Buy Nifty Futures when they rise to Rs. 8000, Set 8045 as profit target and 7980 as stop loss. Each of these three legs involve trade triggers. The condition “when Nifty futures rise to Rs. 8000” can be interpreted in two ways:

– LTP based trigger means to Buy When Nifty Last Traded Price in Nifty is Rs. 8000 or above.

– Bid/Ask based triggers means to Buy when the ask (best seller) in market is available at Rs. 8000 or above. If the ask is below Rs. 8000, the system will not buy.

– Similarly triggers will be used for profit booking or stop loss based exit.

Understanding LTP Trigger in NEST/NOW/ODIN etc.

Unfortunately, most software available for retail traders allow only LTP based triggers. These are highly inefficient and we will try to understand why using example “Buy Nifty Futures when they rise to Rs. 8000, Set 8045 as profit target and 7980 as stop loss”.

For simplicity:

  1. Suppose the best three buyer | seller in Nifty are available at: 7999.75, 7999.85, 7999.90 | 7999.95, 8000.00, 8000.15
  2. At this point a buyer takes away shares from seller at Rs. 7999.95 (LTP). The new buyer|seller are: 7999.75, 7999.85, 7999.90 | 8000.00, 8000.15
  3. The stock is rising, so assume next trade (LTP) occurs at 8000.00, and the buyer takes all stock available from seller at 8000.00
  4. Because of step 3, the buyers | sellers are now 7999.85, 7999.90, 8000.00 | 8000.15, 8000.25
  5. Since LTP is 8000, the system triggers Buy order. Since the best seller is at Rs. 8000.15, the trader has to buy at Rs. 8000.15
  6. For trading two Nifty lots, the slippage loss in this trade is Rs. 0.15*75*2= Rs. 22.50
  7. If Rs. 8000 is important level, the next best seller may be after Rs. 8000.50 or further. In this case the minimum slippage loss will be Rs. 0.50*2*75= Rs. 75!!!
  8. Similarly if we want to Sell a falling stock, we will suffer a significant loss in each trade as slippage

Why Bid/Ask Based Trigger is Best Trading Strategy

If the trigger is bid/ask based, the shares will be bough in Step 2 instead of Step 5. This will save significant slippage costs. If a person is trading 4 lots per day, in one month he will save approximate Rs. 2*75*0.15*22= Rs. 990. Money saved is money earned, so the reduced slippage costs add up as strategy profit.