View Single Post
Old 29-11-2016, 14:20
ForexArticles ForexArticles is offline
Join Date: Mar 2014
Posts: 979
Default Why is Latency so Important for Forex Trading?

Latency or delay as known in computer networking, is the time interval for a process to present an outcome, the time delay between the cause and effect of a physical change within a system. In Forex Trading, latency indicates the time needed for the traders’ requests to get a response from the broker’s server. Latency is considerably important because it can have a huge impact on the price that traders pay in the markets, hence it is significant for latency to be at lowest when making a trade. Traders can identify the range of latency in accordance with the trade that they are executing.

For example, traders trading within short term need to avoid a bad ‘ping’ and high latency, since both factors can be destructive for a scalper’s profits and trades. Traders making long term trades have less to worry about when it comes to latency, since their trades are not restricted to time frames, therefore they have less risk in case of high latency. A ‘bad ping’ can cause traders to make misjudgments and errors in execution on a trade and even in long term trades, it is vital for latency to be at its lowest.

Brokers generally take a lot of protection measures to ensure that latency will not mess up with the traders’ requests. The hardware and liquidity provider of a typical broker will be as physically close to the trading market as possible, reducing the distance a signal has to travel which in turn reduces risks of disruptions and any other issues pertinent to latency. Quality brokers usually warn about latency issues in advance and make their policies keeping latency in mind.

Latency is measured in milliseconds of the time units and the higher the latency goes, the bigger the loss to the trader. Latency is often related to slippage as well, and that’s a reason why a high slippage can occur. Measures taken to protect against this involve setting up upper and lower bounds to manage price fluctuations, ensure that the ISP provider is providing the highest internet connectivity and taking steps to lock in profits in case of non-availability of the trader.

High frequency traders have an average execution time of five milliseconds, which rules out the chance for slippage to occur and latency is much lower than the average traders. There are other professional traders who have a direct market access that gives them the latency time of twenty seconds which most of the time, they also manage to avoid slippage.

Then there are advanced traders who also have direct market access with latency of 100 milliseconds, which ensures that almost nine out ten trades they make are without slippage. There are some advanced traders who use an optimized platform of MetaTrader 4 and these traders have an execution time window in between 250 milliseconds. This is towards the higher side of latency and can run a risk of slippage.

The average trader making trades form their personal computers can have a latency as high as 800 ms which is why almost half of their trades can run a risk of high slippage.

Reply With Quote