Volume and Slippage – The Value of a Pip, and Execution Types

To succeed in the Forex markets and to be profitable it takes more than just trading in the right direction. One needs to find a good broker to trade with, and to fully understand what moves markets. We covered the conditions needed for a broker to be considered a good one in previous articles here on this Trading Academy project. Things like the type of the broker, the accounts offered, etc., are part of the whole trading process. While this may seem not to be that important if the trade is good, in the long run it is crucial. Errors can be avoided, and understanding this can spare you a lot of pain. Besides the technical and fundamental analysis that must be considered before opening a trade, the value of a pip and the execution of the trade come next in line, as both influence the outcome of a trade. Moreover, traders should not only look at a trade, but at the whole trading process. After all, it is important for the account to grow in time, but this doesn’t mean that all trades must be successful. This is quite an impossible thing in trading in general, and in Forex trading in particular, and the sooner the trader understands that, the better. Therefore, besides the analysis that backs a trade, the value of a pip and how to execute that trade are key. If you come to think of it, these two are an integral part of the overall money management system.

Volume and Execution

The volume traded is the one thing that makes a difference between an account that grows and one that fails. A trader may be right 10 times and make money on a 0.1 volume/trade, but then be wrong once on a 2-lots trade and suffer much worse damage.

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How to Treat Volume

forex trading strategiesAs part of any money management system, choosing the right volume is half of the overall success. In-depth analysis is therefore needed before even taking the first trade in any trading account.
Size of the Trading Account
Volume should be directly proportional to the size of a trading account. If a trader deposits 1,000 in a trading account, it is not wise to trade 1 lot, as the account will be depleted in a blink of an eye. Conversely, trading 0.01 micro-lots would be irrelevant, as this approach on such an account size is way too conservative. The idea is to find the perfect balance between the account size and the volume traded. This is money management, and this can work properly if one can define the potential drawdown on an account.

For example, let’s assume a 5,000 trading account with the initial trading volume at 0.1. This means that for every pip earned, on average, the account will grow by $1, if the US dollar is the denominated currency in that trading account. The opposite is true as well: Every pip lost brings a $1 loss. This is trading, and it has to be a start for every trading strategy.

Number of Open Positions
However, this is not everything. Volume refers not only to the actual trading volume of a position, but also to the number of positions one can open at any one moment in time on a trading account. This is equally important, as even if you trade 0.1 lots, if you open 1,000 positions it is as if you’re trading with a bigger volume, and therefore limiting the number of trades open is the key to moving forward. Supposing the account loses 50% of its size, the trading volume should be split in half as well. The same is valid if the trading account gains 100%: The volume should be doubled. Conservative traders will have a strong tendency to split the volume by more than 50%, and to increase it by less than 100%, while aggressive traders will always try for more. With the right strategy, both types of traders may succeed.

Execution

Execution refers to both the way the trade is opened and the way the broker executes it. Slippage is something that must be avoided at all costs. Slippage means that the broker is not able to execute the order at the indicated price. For example, say you have a pending order to buy EUR/USD at 1.0820, and the broker fills the order at 1.0827. That difference of 7 pips is called slippage, and it means the broker wasn’t able to fill the order at the right price. This happens when the market is travelling fast, due to economic events that are causing a surge in volatility. Another reason for slippage is a huge volume. If you try to trade 100 lots multiple times in a trading day, the broker won’t be happy, and consequently will fill you at different prices. The reason for that is the fact that markets are illiquid during some periods in a trading day, and the broker cannot fill huge volumes if the price happens to reach your entry level during such a period. As a result, slippage occurs. To sum up, both the volume traded and the slippage that appears at execution influence the performance in a trading account. Understanding how to control them is key to making it in this highly competitive Forex environment.

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