News Straddling Strategy (Part V)
The risk of slippage is usually very high when trading the news. Currency prices tend to move very fast during such highly volatile market conditions. Slippage occurs when the price you intend to enter or exit the market is different from your actual transacted price.
Placing stop loss or market entry orders under fast moving market conditions do not guarantee anything. These orders do get filled but mostly at different prices than you had intended. Slippage is the biggest problem when the market moves fast. There is no way you can avoid it. Some of it is genuine. During times when too many orders are placed by the traders, most forex brokers cannot offset these orders in the interbank market due to the small amounts involved. They have to take the opposite positions themselves. This gives them the chance to take the excuse of slippage.
Many market makers will wait till after the big move is over. Then they will fill your entry order. Sometimes, these entry orders may even get filled past your stop loss or profit target. This means that you would be left with immediate net loss.
Slippage is a trick that many forex brokers use in order to make profit by filling your position with a negative spread. Before filling your entry order with wide slippage, many brokers will fill your stop loss or take profit order. The wider the slippage, the fatter the profits the broker is going to make. Imagine the number of orders placed with each forex broker and the amount of profits the broker makes from one such single event.
Lets take an example. Suppose you have placed your long entry stop for EUR/USD at 1.2564. Your profit limit is 1.2594. The forex broker may first fill your take profit at 1.2594 and then fill your long entry stop at 1.2604 with a 40 pips slippage.
If filled at the prices you wanted, your trade would have resulted in a profit. But now you have a net realized loss. If the trade goes against you, the forex broker may fill your stop loss order first and then fill your entry order with slippage after that so as to widen their profits.
Now imagine you had placed your stop loss at 1.2544 and your long entry stop at 1.2564. Your forex broker could first fill your stop loss at 1.2544 and then fill your long entry stop at 1.2594 with a slippage of 30 pips. You now have a net loss of 50 pips due to slippage instead of planned 20 pips loss. You could never imagine that you would end up with a loss of 50 pips.
You should know as an individual trader that your orders will be kept pending till you get stopped out or your profit limit is reached during the release of news when the market moves fast. The more you stand to lose and the more the forex broker stands to make a profit, the larger the slippage you experience. Some forex brokers add slippage to any of your orders to increase their profits during times of fast moving markets when the volatility is high.
Many traders readily accept the risk of slippage as one of the realities of trading the news. However, they should know that slippage can eat up a huge chunk of profits and in the end affect their overall profit/loss. You can overcome the problem of slippage through the use of stop-limit entry order. More on it in the next article! - 23223
Placing stop loss or market entry orders under fast moving market conditions do not guarantee anything. These orders do get filled but mostly at different prices than you had intended. Slippage is the biggest problem when the market moves fast. There is no way you can avoid it. Some of it is genuine. During times when too many orders are placed by the traders, most forex brokers cannot offset these orders in the interbank market due to the small amounts involved. They have to take the opposite positions themselves. This gives them the chance to take the excuse of slippage.
Many market makers will wait till after the big move is over. Then they will fill your entry order. Sometimes, these entry orders may even get filled past your stop loss or profit target. This means that you would be left with immediate net loss.
Slippage is a trick that many forex brokers use in order to make profit by filling your position with a negative spread. Before filling your entry order with wide slippage, many brokers will fill your stop loss or take profit order. The wider the slippage, the fatter the profits the broker is going to make. Imagine the number of orders placed with each forex broker and the amount of profits the broker makes from one such single event.
Lets take an example. Suppose you have placed your long entry stop for EUR/USD at 1.2564. Your profit limit is 1.2594. The forex broker may first fill your take profit at 1.2594 and then fill your long entry stop at 1.2604 with a 40 pips slippage.
If filled at the prices you wanted, your trade would have resulted in a profit. But now you have a net realized loss. If the trade goes against you, the forex broker may fill your stop loss order first and then fill your entry order with slippage after that so as to widen their profits.
Now imagine you had placed your stop loss at 1.2544 and your long entry stop at 1.2564. Your forex broker could first fill your stop loss at 1.2544 and then fill your long entry stop at 1.2594 with a slippage of 30 pips. You now have a net loss of 50 pips due to slippage instead of planned 20 pips loss. You could never imagine that you would end up with a loss of 50 pips.
You should know as an individual trader that your orders will be kept pending till you get stopped out or your profit limit is reached during the release of news when the market moves fast. The more you stand to lose and the more the forex broker stands to make a profit, the larger the slippage you experience. Some forex brokers add slippage to any of your orders to increase their profits during times of fast moving markets when the volatility is high.
Many traders readily accept the risk of slippage as one of the realities of trading the news. However, they should know that slippage can eat up a huge chunk of profits and in the end affect their overall profit/loss. You can overcome the problem of slippage through the use of stop-limit entry order. More on it in the next article! - 23223
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and currencies. Know These Forex Broker Games. Learn Forex Trading!
posted by X - Men @ 3:17 AM
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