What is Latency?
Latency (also known as a delay) is a widely used term in computer networking. It is defined as a time difference between triggering a command and taking that command in action. For instance, in Forex trading, latency expresses how much time will be taken in order to get the response from the broker’s server to the trader’s request.
Guest post by Alexander Collins
Latency is measured in time units (milliseconds). Millisecond is 1/1000 (one thousandth) of a second, so 1000 milliseconds equal to 1 second.
For easier understanding of what the latency is, let’s imagine a firehose. If you uncap it will take a few seconds before the water comes out. This analogy is very simple, because uncapping depicts our “request” and water that starts to flow out of the firehose is a “response.” The longer it is more time will be needed for water to come out.
The Influence of Latency in Forex Trading
So why should we care about the latency in terms of the Forex trading? Why is it so important?
The answer is as simple as ABC. High latency costs us money, massive money.
Let me clarify what I’m talking about. Obviously, the lower latency the better. Here is what you can get as the result of high latency: high slippage and so called re- and off-quotes.
Let’s take a closer look at those. Slippage is a difference in time between the moment you place a trade (click “buy” or “sell” button) and the moment when it is executed by the trading server. During this short period of time, price can shift in a few pips in both directions (in most cases, the opposite to your opened position). And even if the value of slippage is not that significant, let’s say 5 fractional pips (0.5 pips), after one year trading your overall profit will be cut with couple thousands of dollars. And it would be far better to spend that money on something more significant rather than giving it in the hands of your broker, wouldn’t it?
Slippage in its turn can cause re- and off-quotes. A re-quote is when your broker places your order at the price which differs from your requested one.
Off-quote is when your broker doesn’t place your order at all, and as the result, you receive an off-quote message stating that trade cannot be accepted at the price you requested. With low latency, the influence of those factors can be decreased.
The tick data flow frequency may vary. There is no defined number of ticks per second. An average number of ticks per second is about 5. With the help of simple calculation, we can say that it takes 200 ms for one tick to emerge.
Different latency – different traders
Let’s divide all the Forex traders into 5 typical categories in accordance with execution time they have: beginning from high-frequency trader and ending with an average user.
1. High frequency traders have an execution time of 5 ms, which is definitely much lower than the average one between ticks. Trading with such an execution time will cause no slippage.
2. Professional traders who have true direct market access (also known as DMA) with an execution time of 20 ms. In most cases, trades will also be placed without slippage.
3. Advanced traders with true DMA. An average execution time for these traders is 100 ms. And 9 out of 10 trades will be placed with zero slippage.
4. Advanced traders who use MetaTrader 4 (MT4) platform with modified (optimized) trading environment. Such type of traders usually deals with 250 ms execution time. As it can be seen, it is a bit higher than the average time between the ticks, so some trades will be executed with an influence of slippage.
5. Average trader who works with MT4 directly from his office or home desktop/laptop. Execution time for such traders can be as high as 800 ms. And, yes, you got it: almost a half of his trades will suffer from slippage.
How to avoid slippage and re-quotes?
So how should we handle this? How can we avoid slippage and latency itself? You see, it is almost impossible to eliminate the latency, but it is possible to decrease. This topic deserves for separate topic. So stay tuned with Alexander Collins at http://pipburner.com, where you will find more topics regarding VPS issue as well as download some freebies for Forex traders.Get the 5 most predictable currency pairs