Traders can adapt to anything a forex broker throws at them on its platform as long as they are aware of it beforehand. What I mean by this is you do not want a surprise, like a spread widening that takes out your stop, re-quote or anything else you are not prepared for. If you are aware of your broker’s practices then you can adjust accordingly. With most, if not all brokers moving to market executions, it is important to evaluate the pros and cons in what I call this the good, the bad, and the ugly.
What are market executions?.
A market execution is when a trade gets filled at the price being quoted at the time the order hits the broker’s server. This means that most trades do not get filled at the quoted price at the time a trader tries to execute a trade but at the prevailing price when the forex broker receives the order. There are pros and cons to market executions that you need to be aware of so you can adjust when needed.
The Good
The good part about market executions is that you know your order will get filled, even if not exactly at the price you tried to trade and there should be no requotes. The only time this won’t happen is if you put in a slippage limit, meaning you do not want your trade executed at a price that varies too far from the quoted price. There is also the benefit of getting filled when you are more interested in seeing your order executed than at what price. This is especially true in times of volatility but these times seem to be more the exception than the norm of late in a low volatility environment.
The Bad
A bad part of market executions is that more times than not your order will get executed at a price that is different than the price you tried to trade at. Some call it slippage. I call it the executed spread, which means what you are actually trading at vs. what the broker claims to be the stated spread. Ideally, this should work in your favor as many times as it works against you but this does not seem to be the case. However, after news events the actual executed price of a trade will likely be different than what is seen on a platform when the order is entered. In extraordinary times, such as the recent Bank of Japan interventions, slippage of stops could be quite significant as prices gap suddenly.
The Ugly
What I mean by ugly is when a trade is stopped out by a widening of a broker’s spread or a stop entry is triggered for the same reason. In market executions, spreads tend to widen just before and just after key events (e.g. U.S. employment, GDP, etc.) as bank liquidity dries up, bank bids and offers get pulled and brokers adjust quotes accordingly. This can also happen as the NY session closes due to reduced liquidity. This can also turn ugly when you try trade during periods of volatility and your orders get filled at prices far different than what is quoted on your platform. It is possible, under these conditions, to think you are making 20 pips on a trade and wind up losing 20 pips.
To sum up, as a trader you need to be aware of how your broker performs under all conditions. To avoid the ugly, you should use limit rather than stop orders and consider using the same rather than market orders, at least until pricing comes back to normal. For some brokers, that can happen quickly, others seem to take their time. The point is to know how your broker performs under all conditions and when needed, adjust your trading so you can avoid a painful surprise.
Contact jay@global-view.com with any questions or comments
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