Stops, slippage, brokers, and everything else to confuse!

Beginner Questions
1

Hi,

This is a post that I’ve been wanting to post for a while now and have been working on the content. I’m now ready to post it.

The purpose of this post is to help new traders understand one or two things that I never understood when starting out. And, unfortuanately, when I DID ask about them: I (for the most part) received those famous ‘one liners’ which helped me ‘not a a sausage’!!!

Stop loss orders and ‘slippage’:

The common perception among new traders (and I’ll bet: some experienced traders as well) is that a stop loss order, when placed, WILL be or MUST be executed by your broker at the EXACT price at which you placed the stop loss order. If it’s not executed by the broker at the EXACT price at which the stop loss order was placed then ‘all manner of hell breaks loose’ and there is much ‘gnashing of teeth’ and the brokers is then labelled a ‘scam artist’. Right???

Well heres the thing:

Take a look at this link (and actually READ about the different types of orders that can be placed AND how they are processed):

Orders

And (if you did not notice): the link is to the US Securities and Exchange Commission website i.e. it’s not to some or the other brokers website where the broker is trying to ‘cover their tracks’ as it were.

Now in simple terms:

When you place a stop loss order at a certain price: when price reaches your stop loss order price the order is executed as a MARKET ORDER BY THE BROKER at the FIRST AVAILABLE PRICE. If the FIRST AVAILABLE PRICE is in fact the price at which your stop loss order was placed then your stop loss order will be executed at your price. That sounds simple enough and no problem so far.

BUT NOW: let’s assume, for example, that you’re ‘trading the news’ and set a stop loss order to limit your loss in case you’re ‘on the wrong side of the trade’. The moment the economic data ‘hits the wires’ the price may spike to WAY past your stop loss order price. Your stop loss order will then NOT be executed at the price at which you placed it simply because the broker CANNOT EXECUTE THE MARKET ORDER (your stop loss order) at your price and will place the MARKET ORDER (your stop loss order) at the first AVAILABLE price.

Now the ONLY way around the above is to place a STOP LIMIT ORDER (see the link above if you’ve not already done so). Problem: MOST brokers do not offer this type of order.

Now for another example (and this can happen in forex at the market open on a Sunday night):

Let’s say that on Friday night, just before the market close, you place a stop order to enter a position at a certain price. Over the weekend: price moves in the direction of the order that you placed (the banks and some other institutions trades over the weekend) and goes way PAST the price at which you placed your stop order. At the market open on Sunday night: your stop order will be executed AS A MARKET ORDER BY THE BROKER at the first AVAILABLE price which, again in this example, will NOT be the price at which you placed your stop order to enter.

Now this works ‘both ways’ as well. Let’s assume that you’ve placed a stop order that, if executed, will result in you closing a position at a profit. Using either of the scenarios above as an example: if price goes in your favour then the amount of profit that you will make will be increased because AGAIN your stop order will be executed as a MARKET ORDER BY THE BROKER at the first AVAILABLE price.

Summary of the above:

The placing of a stop loss order is NO guarantee that it’s simply going to be executed at the price at which it was placed. For the most part, under NORMAL market conditions, stop orders will in fact be executed at the price at which they were placed but this is NOT (always) the case at ‘news times’ or when you have ‘opening gaps’ i.e. the difference between the closing price at market close on Friday night and the opening price at market open on a Sunday night.

All of the above is also applicable to those of you who trade equities or commodities at an exchange where you have fixed opening and closing times.

Now, sadly, the above has come to be known as ‘slippage’ and the broker is always blamed for this. I hope that NOW you can see WHY this happens i.e. when this happens it does NOT mean that your broker is trying to ‘fleece’ you of some points (pips). It’s simply the way the market works.

Now I’m sure that some of you have experienced what are called ‘requotes’ i.e. when you try to enter a position using a MARKET order and your platform comes back to you with a ‘requote’. Again: this leads to much ‘frothing at the mouth’. THIS IS NORMAL and again is NOT the broker trying to ‘fleece’ you. What you have to understand is this: your order is NOT the only order in ‘the system’. Price moves in ‘split seconds’. Do yourself a favour: take a look at Bloomberg TV (for example) and pay particular attention to the tickers that are displayed BEHIND the presenters (normally the Dow Jones Industrial Average ticker is displayed live from the NYSE at the bottom of the screen). You’ll note that price changes in ‘split seconds’ i.e. it does not change every minute or two but in ‘split seconds’. This is why you may get a ‘requote’ i.e. the trading platform / broker is informing you that price has now moved and is showing you the next AVAILABLE price and it is up to you as to whether or not you want to accept that price or ‘move on’. Irconically: this is EXACTLY what is happening at the ‘broker side’ in the scenarios detailed above relating to stop loss orders!!!

‘Help: my broker is trading against me’ or ‘Help: my broker is taking the other side of my trade’!!!

Again: more ‘myths’.

Now there are some brokers (marketmakers) that indeed ‘take the other side of your trade’ i.e. your trade is ‘not leaving the front door of the broker’ but in effect you’re trading with (against???) the broker or the broker’s clients. THIS MAKES NO DIFFERENCE AT ALL to your trade. If your trade is profitable then it’s profitable no matter WHO is ‘on the other side of your trade’. Simply put: if your trade is a ‘winner’ then either the broker or the broker’s client(s) is the ‘loser’ and that’s of no concern to you.

Summary of the above:

The broker is not ‘out to get you’ and neither is the market (whatever market that may be). If you have a trading methodology that works there is NOTHING that ANYONE can do to ‘make you lose’.

I will continue to add to this post as and when I come across things that I remember caused much confusion for me when I ‘started out’.

Regards,

Dale. (forexbrokersonline.net).

2

Requotes are not a part of normal market transactions, what are you talking about?? They are a product of dealing desks, where they have shown a price that they actually can’t deliver, simply because their fixed spreads are too narrow to cover the volatility while ensuring they get their commission from the spread.

REAL market orders are executed as soon as the order is processed at WHATEVER price is available on the bid/ask. You click the price you see and if there is any difference in the fill price, it is because of latency/server processing and you will not be “requoted”. Think about it, if you have to decide on a different price after you enter the market order, you are defeating the purpose of entering a market order!!

Market orders are the “hail mary” of trading transactions and traders using them understand they are sacrificing a sure price for INSTANT order execution. Taking that away from traders trying to enter market orders is frustrating and that is why I would only ever using market orders on a trustworthy ECN broker with very fast and proven order execution.

3

Hello,

Nice to see / hear from you again.

I have to disagree with you (or should I say that I hope we can agree to disagree)!!!

I’m not saying that it’s OK for EVERY market order to be requoted. If that was happening then I’d agree that there is something ‘not quite right in the state of Denmark’. However: market orders being requoted DOES happen ESPECIALLY in times of high volatility and this is normal.

Also: if you’ve ever had cause to deal through a stock broker by phone you’ll know then that they will give you a certain price and if you hesitate then that price is no longer valid and you weill be ‘requoted’ over the phone.

Anyway:

The point of my post (above) is this:

Too many times the impression is created that EVERYTHING is ‘against you’ and it’s not the case. Most of the ‘stories’ that you hear get started because people do not UNDERSTAND how things work or things have been incorrectly explained to them. They see a post somewhere that refers to ‘slippage’ or a post somwhere else that someone has been ‘requoted’ (once in twenty trades I’ll wager) and all of a sudden the broker is called ‘all manner of names under the sun’ and the broker is out to ‘sr*w you’ etc. etc. etc. It’s just simply not the case.

Just take a look at the threads on this site and you’ll quickly see that there are LOADS of posts where either the above has not been explained and the poor trader has to ‘surmise’ what’s going on. You’ll also see that a good many people raise their levels of stress worrying about ‘issues that are not issues at all’ instead on concentrating on findiing a trading methodology that works.

I mean: just today there is a post ‘lurking around’ where the trader is almost sure that his one broker is ‘doing him in’ because there he was in the same trade at two different brokers but got stopped out at one of the brokers. Someone has not explained nicely to the chap that you’re probably hardly ever going to see the same price at every single broker at exactly the same time (and before YOU start ‘frothing at the mouth’ I not talking about +/- 500 pips i.e. one or two pips here or there).

Anyway: the point is that if you place a market order to buy EUR/USD at 1.2718 and the broker requotes you at 1.2720 then it does NOT mean that the broker is trying to ‘do you in’!!! There are MANY valid and legitimate reasons why you could be requoted. And not only that: it’s your choice as to whether or not you’re going to accept the price anyway.

Of course: if you’re a ‘scalper’ (which as you know I’m not) then I suppose you NEED ‘ever last pip’. And yes: this is why it’s not a ‘big deal’ to me.

Regarding stop orders: pick up any trading book ‘worth the paper it’s written on’ and you’ll see something like ‘I placed an order at X and was filled at Y’. Again: the myth exists that because YOU have placed an order at X it MUST BE FILLED AT X NO MATTER WHAT otherwise you’re being ‘scr*wed’. It’s just simply not the case.

I think that many people forget what the word ‘trading’ actually means. You’re ‘trading’. In other words: I want to buy something from you. I’m prepared to offer you X. You’re prepared to accept Y. There is your requote. I’m happy to pay Y so there is your trade. If I’m not happy to pay Y I try to do the TRADE someplace else and good luck to you!!!

Also: you mention using a trusted ECN broker. Most people on this site will not have an account with an ECN broker. This subject has been ‘torn apart’ MANY times on this site but the fact of the matter is this: if somebody trading micro lots at an ECN broker thinks that they’re trading directly with banks and financial institutions simply because their broker is an ECN broker then they’re sorely mistaken.

Regards,

Dale. (forexbrokersonline.net).

4

Good post dpaterso. I had a couple of requotes happen to me recently on IBFX. I got all in a huff about it and went on their chat help. Basically, got the same explanation you just gave. Made sense after a looked back at the charts, I was trying to get in a quick momentum move in the middle, instead of at the start. Of course I wasn’t using a market order specifically, just hitting close, which turns into a market order once you click it. So, you click close and if price jumps on you, you get a reqoute.

Annoying because you have to click another time, but the reqoute was rarely off where I wanted to close by more that 1-2 pips anyway.

Makes sense now. You can’t buy at x price at the market, if x price isn’t available in the market.

5

In the dialog box of the platform MT$ used to put orders of buy or sell, in the low left part an option exists to allow the desviation of the price, one can choose from zero up to the number of pips that the trader admit to negotiate differently from the price to which it is done click.

The Requotes is very usual en volatile markets.

Finally, I agree with dpaterso.

Regards

7

Ya, but another guy using the same broker as I am said when used the deviation, he always got the deviation. So, far requotes havn’t been a real problem for me, when I get them they aren’t far off.

8

the next time you get a requote, exit the trading ticket and try it again — you will prob be greeted by a much more favorable exit.

“requote” is not based on much more than the broker stalling your exit, and most people just take the available price and let it go.

its amazing what happens if you send out a limit order for your tp and they hit it and not pay you — THAT puts out a VERY strong case against them !

also try a limit buy order and see what happens – you shall be very surprised !

mp

9

I’m not saying that requotes are some evil procedure conjured up by dealing desk brokers, just that the “market orders” made available by these brokers aren’t true market orders in the way they are on an ECN broker.

I use a fixed spread, dealing desk broker (GFT) and I have no problems with that business model, since you are absolutely right that it’s pretty much a given that unless you’re trading a 5figure+ account, you’re going to have to deal with a dealing desk. The lot sizes of real interbank orders are waaay too huge for somebody just starting out.

I accept that reality, but also know that if I was trading large amounts of money I wouldn’t settle for requotes on my market orders! I think it’s important for everyone to know that generally the more money you are willing to deposit, the better (and cheaper!) order execution you are going to get. It’s really an exclusive market and if you want to be on the frontlines of the bid/ask, you have to be willing to buy and sell lots in the million range.

10

Good morning,

Well, OK: you’re both right of course. But let’s stop the ‘flexing of the muscles’ and try to ‘stem the flow of testosterone’ shall we.

All I was trying to get at is that there are certain things, very BASIC things, that are never explained ‘in depth’ (well they were never explained to ME ‘in depth’). I’ll tell you this: the ONLY reason that I found out EXACTLY what the mechanism is for stop order execution was because I’d had an order ‘slipped’ by a broker (and it was a BIG ‘slip’ due to an opening gap on a particular stock) and I started ‘frothing at the mouth’ and ‘lost it’ with the broker. This particular broker then referred me to the SEC website (they actually did honor my stop order after this but that’s really nothing to do with the subject matter). Now I appreciated this because I was being given a CONCRETE REASON that I could not dispute as to what happened which is a FAR CRY from the ‘usual’ answer of ‘well that’s just the way the market works’ (an answer which I’ve had many times before and is of use to ‘no bugger’).

As far as LIMIT ORDERS are concerned: I personally have never had a LIMIT ORDER not executed EXACTLY as placed so I cannot comment. I have had the LIMIT ORDER price APPEAR to be reached and the order has NOT been executed BUT (and I’m glad you brought this up): price has to move THROUGH the LIMIT ORDER price BY AT LEAST THE SPREAD for it to be executed. In other words: sometimes people forget to (or don’t KNOW to) compensate for the spread when placing a LIMIT ORDER so what happens: price will JUST ‘touch’ the LIMIT ORDER price but price will still be within the spread so it APPEARS that the LIMIT ORDER price has been reached but it actually has not. Price then turns, the LIMIT ORDER is not executed, and then ‘THOSE message threads’ get started again. Something else to just be aware of.

Regarding ‘requotes’: as I said, you’re both right. Again: my point is that the new traders at which this thread is targeted WILL be trading through a dealing desk (unless they’re trading HUGE amounts as you say in which case they should be giving ME that money and not using it for tuition fees) and they WILL be ‘requoted’ FROM TIME TO TIME but the point I’m trying to get across is that it’s NOT the ‘end of the world’ and does NOT mean the ‘the entire trading world including their broker’ is against them and does not WANT them to succeed. I do, however, stick to MY reasons given for ‘requotes’.

These ‘basic things’ are important to know. I’ll bet you that you’ll find more than ten ‘systems’ here where someone is encouraged to ‘trade the news’ and the system will include the placement of a STOP LOSS ORDER. A new trader will see this, think that they’re immune from incurring a big loss because they now have a STOP LOSS ORDER in place, and ‘guess what happens’.

Regards,

Dale. (forexbrokersonline.net).

11

Well I have to come in and say a few words from time to time Dale because your walls of text can appear the word of God to a new trader heh

Don’t worry, I respect all your opinions, but some debate is good for the forum :wink:

12

LOL!!!

Thanks for the compliment (I think)!!!

Point taken and noted!!!

Regards,

Dale. (forexbrokersonline.net).