When trading on Forex markets, the speed of order execution can sometimes define the outcome of a trading position. Depending on the trading strategy, it might be crucial to execute a trade instantly without latency, which can cause trades to open later at unwanted prices. Let’s explain what latency is in trading and why it matters in FX.
Latency in FX explained
In financial trading, including Forex, latency is a time delay between when a trading order is placed by a trader and when that order is executed on the trading platform. This delay can affect the price at which the order is filled and lead to slippage where the execution price differs from the intended price. Lower latency is critical for traders when they employ strategies that require quick opening and closure of trading positions. Low latency Forex brokers, such as Axiory, ensure trades are executed right away without slippages and at a desired price to help traders make profitable trades. Since the intermediaries between traders and financial exchanges are brokers, their service quality and execution speeds are very impactful for traders.
What causes high latency?
High delays can be caused by several factors, such as a bad internet connection on the trader’s side. This can be caused by low-quality internet connection. Traders should ensure their internet connection is fast enough to allow the trading platform to function without issues and delays. However, sometimes it might be the broker’s fault. Unreliable brokers or beginner brokers who have low-quality infrastructure can have high delays between when a trader places an order and when the order is executed.
Order execution models and latency
There are several models in which brokers execute trading orders. These models include STP, ECN, and MDA. There is also a market-maker model, but these brokers are called B-book brokers and are not recommended because they take the opposite side of traders’ positions. The STP stands for Straight Through Processing. STP brokers route trading orders directly to liquidity providers as banks or another broker without intervention. ECN or Electronic Communication Network aggregates prices from multiple liquidity providers and displays the best available bid and ask prices from other market participants within the network. ECN brokers typically charge commissions for trading and have lower spreads. DMA stands for Direct Market Access model, and it provides traders with direct access to other exchanges placing orders directly into the market. The MDA model has typically the lowest latency, followed by the ECN model. ECN brokers allow traders to have very low spreads for a tiny commission and are more suited for scalpers.
Benefits of low latency
The main advantage of low latency is lower slippage and better execution prices. The trader receives a better price for their trading positions and can open and close positions faster. While scalpers benefit the most from low latency, during major economic news, news traders also get the advantage of the opening and closing positions right away to catch increased volatility.
The Importance of Low Latency Brokers
Low latency brokers ensure traders are capable of instantly opening and closing positions, reducing their slippage and enhancing their overall experience. Lower slippage which translates into better pricing increases profit potential as a trader has access to better prices and can catch more profits. High latency increases trading costs and is not recommended for short-term day traders who are trying to capitalize on small movements.
Scalping and Latency
Low latency is especially critical when using scalping strategies. Scalping means quickly opening and closing trading positions to capitalize on tiny price movements, and latency can seriously damage the profitability of such strategies. Low-latency brokers execute trading orders right away at a preferred price and allow traders to implement such short-term methods. Minimizing the impact of price changes that can occur in the milliseconds between placing and executing an order enhances the overall trading experience and allows traders to trade with confidence, which is crucial in financial trading.
