Forex Professional System Trading – What is Slippage in Forex Trading and Why Should I Be Aware of It
Posted August 24, 2010 – 9:31 am in: UncategorizedForex Professional System Trading
I didn’t pay much attention at the time; after all, I had an expert adviser integrated into my trading platform (Metatrader) so I didn’t need to do anything, did I?…… Hmmm. Forex Professional System Trading
I’ve learned since, that all Forex Brokers are just NOT the same. Out of all the investment that goes on in The Forex Market, most of it is still largely dominated by the banking institutions, various governments and global corporations. The “little guy”, ie the private trader, accounts for under 20% from my understanding. But the forex brokers do want our business.
So what IS slippage and why should we be aware of it?
When I decide to open a new trade I usually want to enter at a certain price; let’s just say this example price was 1.3440. Just before I place the order with my broker, I choose to calculate where my maximum risk should be (this is known as a stop loss) and again for example we’ll say this level is at 1.3340 – ie 100 pips away from my entry price.
Now, the last thing I choose to calculate is a point at which I will want to cash out of the trade if it goes in my favour; a “take profit” level. We’ll say this “buy trade” level is at 1.3540 – ie 100 pips away from my entry point. So, to summarize so far, looking at the 3 levels (entry, stop loss & take profit) I can see that this trade would have a risk ratio of 1: 1 and I would be OK with that.
Now it could be that when I call my broker, or go to place the trade online, the market I’m attempting to trade has sped up a little. So I hit the button (online order) to enter the market at my level of 1.3440; the screen goes does nothing for a second or two and then I see my order is filled at a price of 1.3465 – ie 25 pips above where I wanted to get in. This is slippage in action. Forex Professional System Trading
The broker “will attempt to fill our order at the nearest price”, but sometimes – often in a fast-moving market – we can’t get the actual price we would like. And this has the effect of completely changing the risk ratio of our carefully planned trade.
If you do the math, you’ll realise that our risk distance is now 125 pips away whilst our take profit point, just 75 pips. This gives us a negative risk/reward trade when we originally entered with the intention of a 1: 1 ratio. So now the odds are more in the broker’s favour (when that wasn’t our intention for this particular trade).
I mentioned earlier that (in my view) not all forex broker were the same. I don’t want to cast unnecessary aspersions here, but there have been occasions in my past trading activities when there’s been absolutely no reason why my entry price has changed so much and I don’t doubt that “dirty tricks” go on within some broker firms. (price re-quotes is another area but that’s a slightly different topic).
However, there are ways we can curb these slippage amounts. With manual trading (usually online in my case) we can select a maximum amount away from a chosen entry price that we’re prepared to accept. If the market prices goes beyond such level our trade simply would not be filled………. And these are usually the one’s I’d just look at in amazement at it goes on to do just as I has suspected, but without being in the trade. There is another way to keep this naughty little area in check, too. Look carefully at the broker!
At the time of writing, there is a growing number of STP (straight through processing) Brokers available to the private trader. These businesses tend to be more set up for private traders placing trades online, usually have tighter spreads (smaller difference between the buy and sell prices = more profit/less risk) and state that their systems cannot see or determine where we would place our risk levels or take profit levels. I for one, have certainly had better experience with this style of Broker. Forex Professional System Trading
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