What is latency in forex and its importance in trading?
If you trade using a Robot or Expert Advisor, you must have to focus on a low latency connection from your broker server. Not only for Expert Advisor but also a low latency connection is essential if you trade manually from your computer. Professional traders consider latency as a crucial part of trading success. It is the value of low latency for retail and institutional Forex investors that has spurred technological development throughout the industry of IT colocation suppliers, pioneers, and specialized telecommunication service providers. The race is on to drive the fastest information transmission.
“Latency” is a lapse in time between an order request and the order’s execution. The speed at which traders gain access to info and analysis the market after that communicates the order to the broker, which executes it at the preferred price, is essential to long-term success. So, low latency connectivity is vital to guarantee that the time taken to finish the whole process is maintained a minimum.
Forex Market Structure:
Foreign Exchange (Forex) is a decentralized marketplace. Trading in this market includes handling orders on a worldwide range. Various currencies come into factor to consider as well as decisions are made based upon the accumulation of market information coming from New York City, London, Singapore, Tokyo, Sydney, and also all over in between. Data is collected from all major centers around the world; so typically, there exists an inherent latency within this procedure.
A trader cannot control lots of root causes of data lag. Excess latencies can be existing in net connections, broker agent web servers, exchange servers, or in the trader’s computer or software. These occasional issues with hardware or bottlenecks in exchange data transmission often go undetected. Sluggish web connection can postpone the whole process and also make strategies go crazy.
So, minimal latency comes to be important in FX trading to get a competitive advantage, and investors make every effort to locate high-performance trading platforms with a low latency price. The assistance of a reputed and controlled broker is also significant, as traders cannot deal with all technological issues by themselves.
Negative Slippage and Requotes
The latency between order requests as well as real execution creates slippage. The trader’s orders get loaded at a cost that is different from the desired level, either higher or lower. When prices are often loaded at unfavorable rates, it brings about negative slippage. This can be an outcome of intense market volatility, following the launch of an economic indicator or any other damaging news. Typically trading properties with reduced liquidity additionally boosts the risks of adverse slippage. Yet, high latency can likewise be a root cause of negative slippage. This can compromise numerous trading strategies, resulting in lower long-term outcomes.
Furthermore, latency is an issue when investors have to handle re-quotes and off-quotes. Requote is when brokers have to put orders at different prices than what the investor anticipated. Off-quote ways that the broker is no longer able to implement the order, since the trade is no more practical, based on the requested price.
The technical style of a trading terminal needs to be robust to prevent this latency. Transactions have to be facilitated at broadband, particularly for volatile currency pairs, like the GBP/JPY or EUR/JPY.
How to overcome Latency Issues:
In this fast-paced international FX trading environment, high latency is a total dampener. Low latency is vital for producing liquidity, minimizing spreads, and lowering the overall cost of trading. At the same time, the marketplace is continuously transforming, which makes factors like transparency and high quality of execution pricing very vital to firms’ trading plan.
First of all, there requires to be a greater emphasis on improving the effectiveness of the trading processes, rather than simply the speed. This can consist of complete audits of trading policies, functional and compliance threats, and the overall strategy and procedure. Full order implementation with minimal information leakage is also a priority for several financial investors.
Checking out the technological aspects, one method that high latency is handled is direct market access (DMA). The buy-side company here has a straight link to the order publication at the exchange. Several actions in the order directing process are removed this way, which means that orders reach the exchange rapidly and are executed ahead of others. Till rather lately, DMA accessibility was booked for institutional investors. Now it appears for retail trading too. In this manner of positioning, orders give higher adaptability as well as transparency.
One more way to minimize latency is by choosing to trade with an ECN broker. ECN means Electronic Communications Network. This is used by a broker to offer customers direct access to other participants in the forex market, consisting of top-tier liquidity providers. ECN brokers combine quotes from several market participants to provide clients with the tightest bid/ask spreads. Price feed transparency is one more benefit of ECN systems. All ECN brokers have access to the same feed, indicating much less risk of rate adjustment.
Read Full Post : Forex Success Blog