Why is it that certain traders always seem to catch market opportunities while others are left watching the profits slip away? The answer lies in the speed of execution in many cases. Execution speed is the time it takes for you to identify the trade and complete the order, once you hit 'buy' or 'sell'. Execution speed is important in CFD trading because that small detail can have a significant effect on your overall profits, especially when markets are volatile, or you are trading often.
Execution speed is often associated with latency (how long it takes for your trade order to reach the broker's server) and slippage (the difference between the order price you expected, and what you actually buy or sell). When the EUR/USD pair moves 50 pips in a matter of seconds, even a delay of 200 milliseconds can cost you 5 pips in slippage. That's real money going down the drain.
What Execution Speed Really Means
Simply put execution speed is the actual time it takes from the point you submit the order until your order is executed. Simple enough! But like any concept, we should explore the related terms that impact the applicability of speed and execution in your trading.
Latency refers to the distance in milliseconds it takes for your order signal to transfer to your broker's server. Slippage is the price movement occurring in the distance between the submission and execution of your order. Ultimately these three aspects together account for the total price of your last trade.
Key Determinants of Execution Speed
Market volatility is the first consideration. In periods of high volatility, such as the London or New York market open, GBP/USD can be infinitely variable within seconds. Thus, you might lose price altogether if you are off by 500 milliseconds.
The type of trading platform you use also makes an enormous difference. Straight Through Processing (STP) platform will forward orders directly to liquidity providers. Electronic Communication Network (ECN) pricing is essentially the same, but ECNs normally offer the quickest execution because they provide direct market access.
How to Improve Your Execution Speed
Begin with selecting brokers. Make sure that you choose ones providing direct market access as an ECN or STP broker is far better than a market maker. If a broker is posting execution speeds of below 100 milliseconds - make sure that this was tested by an independent review or you also verify it on your end with demo or real trades.
Maximize the speed of your setup. If fiber-optical internet is available, upgrade. Be knowledgeable of your physical distance to the broker server (e.g a New Yorker using a broker server data located in Sydney). A few serious traders go as far as to relocate to areas around the financial centers or use VPS options that are located close to the exchange servers.
Mistakes to avoid relating to execution speed
The first mistake is focusing on just advertised execution speeds and not verifying the performance in real time. Brokers will all say they have a 50-millisecond execution speed, but if you are trading in a market that is volatile they may only deliver 500-millisecond execution. The only way to know this is to test them in different market conditions.
Another frequent mistake is fixating on the time it takes to send an order, and then completely ignoring slippage. Fast order routing does not mean a thing if you get 3 pips of slippage every time you trade because of poor liquidity or wide spreads. It is all about execution quality as a whole, not just speed of execution.
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