In Forex trading, fast access to information is important. This is because it enables traders to make informed decisions when placing orders. Having the orders executed quickly influences profitability hence a low latency connection is key. This is why there’s an importance of latency when trading.
What is Latency?
Latency is the time taken (in milliseconds) for an order to be sent from your trading platform to the broker and back with an exectuted response. So when you open a trade it is exectuted on your platform only once the broker has acknowledged with their response back to your platform. This amount of time is referred to as latency. It’s also called “execution-time” or how long time it takes to execute an order.
Latency greatly influences the amount of time traders interact with the market. Forex transactions are done electronically, therefore, latency issues cannot be ignored. Finding ways to manage latency ensures traders gain a competitive edge in the market.
The Process of Order Execution and Where Latency Occurs
Once a trader has analyzed the information available and is ready to enter the market, the trade undergoes the following process;
- The trader places an order through the trading platform.
- The brokers providing the trading platform receive the order through their servers.
- The broker transmits the order to liquidity providers which is then placed in line for execution in the market.
Latency can occur at any stage mentioned above hence a delay in order execution may increase potential for loss because of slippage. In the exchange of information, latencies may occur in the following components;
- Poor internet connection.
- System failures of market and brokerage servers.
- Outdated traders’ computer software and hardware.
How do I see my latency in MT4?
If you go to the bottom right corner in MT4 and locate the little colourful “stairs” icon and click it, it will look like this.
In this example, the latency is 330.95 milliseconds which is very high. You should aim to never have more than 100ms. The best speed is the lowest possible, and in some cases you can come below 10 ms, which is great. The Datacenter that has a tick marked to the left of it is the one you’re currently connected to. (In the image above it’s Demo DC#6).
Importance of Low Latency in Forex Trading
- Solving issues on internet connectivity, brokerage, and market-based servers allow prompt access to information which enables traders to make informed decisions before entering the market.
- Low latency levels increase the potential for profitable trades through faster execution of orders.
How to Manage Latency
There are different ways to reduce issues with latency and they include;
- Direct Market Access. This provides direct access to the exchange. Here, a trader enters an order through a connection to the exchange which is then placed in line for execution.
- Updating computer software and hardware for smooth operation.
- Ensuring you have a robust internet connection.
- Evaluating the efficiency of trading platforms of the brokerage firms. This enables one to identify a reliable broker with low latency levels.
- Using a Webtrader. Brokers usually place their webtrader on servers close to their trading server for faster execution.
How a VPS helps with Latency
Many professional traders rent a VPS (Virtual Private Server) that is located close to the brokers trading servers. This means that the latency comes to a minimum and less interruption happens when placing an order. It also greatly increases the speed of quotes and charts.
If you’re interesting in where to get a Forex VPS, we’ve created a list of recommended Forex VPS providers.
Latency is important to keep as low as possible. To increase profit potential, ways to manage latency should be implemented to serve all players in the Forex market. For example trade on fast internet connections or use a VPS.