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Slippage Study

  • #1
  • First Post: Oct 13, 2007 8:07am Oct 13, 2007 8:07am
Moving beyond the strategies that go into a successful trading system, let's get down to the nuts and bolts of execution.

What EXACTLY is happening when your order hits the market?

1) Why is it better to chunk orders into smaller lot sizes?

2) What does the Level 2 look like at the market you are trading in (IE the ECN pool of liquidity)


I want somebody to spell out of for me (and everyone else) exactly what happens when slippage occurs.


You have two groups. Sellers on one side, and buyers on another. Here is where I get confused: WHAT CAUSES PRICE TO MOVE UP OR DOWN? Is it when two parties meet at a price that is above or below the current price?


And one last question:

WHAT IS THE WORST SLIPPAGE YOU'VE SEEN FOR EACH PAIR AT YOUR ECN?
  • #2
  • Edited 1:28pm Oct 13, 2007 1:27pm | Edited 1:28pm
Quoting tdion

WHAT CAUSES PRICE TO MOVE UP OR DOWN?
Hello

I saw this question often raise disputes on forums, but i'll try to answer, and hope is the good answer

To be able to buy a commodity, someone have to sell it. So you start yelling that you want to buy and at what price, but nobody wan't to sell it; so you increase your bid price until someone is willing to sell you that commodity (everyone has a price ). So, you made the market move...
Same thing happens when you try to sell something

Speaking from a trader's point of view, if there are more lots in the bid then in ask, price moves up; if there are more lots in the ask then in bid price moves down

Hope my answer is useful
"Abandon all hope, you who enter here" La Divina Commedia, Dante Alighieri
  • #3
  • Oct 13, 2007 2:33pm Oct 13, 2007 2:33pm
Quoting semar
Hello

I saw this question often raise disputes on forums, but i'll try to answer, and hope is the good answer

To be able to buy a commodity, someone have to sell it. So you start yelling that you want to buy and at what price, but nobody wan't to sell it; so you increase your bid price until someone is willing to sell you that commodity (everyone has a price ). So, you made the market move...
Same thing happens when you try to sell something

Speaking from a trader's point of view, if there are more lots in the bid then in ask, price moves up; if there are more lots in the ask then in bid price moves down

Hope my answer is useful
That's a very good answer ,Semar. Can you tell us where can we see the number of lots that are being traded on the Ask or Bid? Could we not use that information to identify the direction of the market for that pair ( short or long time)? Off course that info has to be real-time and not lagging.

Thanks
  • #4
  • Oct 13, 2007 3:33pm Oct 13, 2007 3:33pm
Quoting tdion
Moving beyond the strategies that go into a successful trading system, let's get down to the nuts and bolts of execution.

What EXACTLY is happening when your order hits the market?

1) Why is it better to chunk orders into smaller lot sizes?
How big do lots sizes have to be before you need to break them up?
  • #5
  • Oct 13, 2007 4:58pm Oct 13, 2007 4:58pm
Quoting bravester
That's a very good answer ,Semar. Can you tell us where can we see the number of lots that are being traded on the Ask or Bid? Could we not use that information to identify the direction of the market for that pair ( short or long time)? Off course that info has to be real-time and not lagging.

Thanks
forex is a decentralized market, and I don't think is possible to get a full order flow (at least for retail traders). some brokers offer the order flow, but i don't know how reliable it is... or you can always switch to a centralized market
here are some links from ff members
Reading order flow: http://www.forexfactory.com/showthread.php?t=10852
The structure of forex brokesr by Darkstar: http://www.forexfactory.com/showthread.php?t=7484
"Abandon all hope, you who enter here" La Divina Commedia, Dante Alighieri
  • #6
  • Oct 13, 2007 5:17pm Oct 13, 2007 5:17pm
Quoting tdion
I want somebody to spell out of for me (and everyone else) exactly what happens when slippage occurs.
you see a price offered, but by the time your market order hits the books, the price is gone and you are given the next best price.

btw, slippage cannot occur with limit orders (well, it can, but only in your favor). so if you are ever worried that your market order might slip, use a limit!
Relax and be happy.
  • #7
  • Oct 13, 2007 10:26pm Oct 13, 2007 10:26pm
Yes, but isn't it also that price could pass over your limit order if your price never really happens ? Or hit your limit order on the way back in the other direction, putting you in a losing trade ??

Quoting merlin
you see a price offered, but by the time your market order hits the books, the price is gone and you are given the next best price.

btw, slippage cannot occur with limit orders (well, it can, but only in your favor). so if you are ever worried that your market order might slip, use a limit!
  • #8
  • Oct 14, 2007 4:09am Oct 14, 2007 4:09am
Quoting merlin
you see a price offered, but by the time your market order hits the books, the price is gone and you are given the next best price.

btw, slippage cannot occur with limit orders (well, it can, but only in your favor). so if you are ever worried that your market order might slip, use a limit!
i think you are the biggest suporter of limit orders from ff

do you use limit orders on normal market conditions too?
"Abandon all hope, you who enter here" La Divina Commedia, Dante Alighieri
  • #9
  • Oct 16, 2007 9:27pm Oct 16, 2007 9:27pm
Yeah Merlin, perhaps a thread on limit orders would be appropriate.

I think there is a demand for the more advanced topics such as these. Particularly the mechanics of execution. Some of us need to know every nuance of what happens "under the hood."

Quoting Tiki Trader
Yes, but isn't it also that price could pass over your limit order if your price never really happens ? Or hit your limit order on the way back in the other direction, putting you in a losing trade ??
  • #10
  • Oct 16, 2007 9:44pm Oct 16, 2007 9:44pm
Quoting semar
do you use limit orders on normal market conditions too?
limit order is my default order type in all markets, forex, commodities, stocks, everything. i only use a market order if i am absolutely positively sure that i will get the displayed bid/offer price OR if i really dont give a damn what price i am filled at.

btw, this is not a weird personal preference of mine, all professional traders i have traded with use limits as their default. its actually a strange phenomenon in forex that the majority of traders use market orders. it stems from the brokers i believe, they assign odd names to the order types and promote ideas like fixed spreads.
Relax and be happy.
  • #11
  • Last Post: Oct 16, 2007 9:54pm Oct 16, 2007 9:54pm
Quoting tdion
I think there is a demand for the more advanced topics such as these.
its actually quite basic. if i were to write a "beginners guide to forex", the first chapter would be about the order types. i dont even understand how one can trade without understanding what their orders mean!

the most important thing to understand is that there are only two main order types... limit orders, and market orders. every order you place is one of these two.

most orders you see with the word "stop" in it is a market order.

a "stop loss" is a market order
a "buy stop" is a market order

there are about a hundred other order types, but all of them are a derivative of the market and limit orders. once you udnerstand the difference in the two, all the other order types become clear as well.

ive never been the best at explaining what a market order and limit order is. its one of those things that is easy to feel but hard to explain. i did give one example about bottles of water and there have been several other explanations on the forum. my advice is that if you dont understand the difference between a market order and a limit order, dont place another trade until you understand it!!
Relax and be happy.
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