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What Is Latency and How It Influences the Forex Market?

Successful trading depends on different factors. If you want to measure success, you may need to rely on numerous criteria that come into play. And latency is one of those factors although quite often overlooked or even missed by traders of different levels.

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While online trading and e-brokers have turned into a dominating force in today's financial arena, we often hear such new terms as network latency that are pretty hard for non-technicians and newbies to figure out. What is latency? What does the term mean? How does it influence the Forex market?

These are the questions we are going to answer in this article.

What Does Latency Mean?

To make things a bit simpler, let’s define the term “latency” as a synonym for the word “delay”. In other words, it is a timeframe needed for the order to be executed. It is time, which takes an order to get from a trader to the broker’s server. When we say “high latency”, we mean fast order execution, and vice versa, low latency means delayed operation response. As a rule, it is measured in milliseconds just the same way as website page loading speed.

The Importance of Latency

As we know, the market never stops moving. It fluctuates together with the price. Sometimes changes may take place on the spur of the moment. Traders have a couple of seconds to react properly and make instant decisions. Otherwise, they will lose a trade.

What’s more, active traders require latency to be not only high but also constant. To achieve that, different factors should be taken into account such as internet connectivity, software, broker server performance, trader's hardware, etc.

Additionally, latency is not just the speed of order execution. It also defines how fast you will receive essential market data along with updates and insights. If a trading program is poorly coded or comes with low-performance servers, it may result in delayed info delivery, improper trading signals. And lost profit opportunities. Every microsecond may turn out to be fatal, especially when considering slippage.

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What Is Slippage?

Latency may have different forms and slippage is one of them. It measures the difference between the price at which trade is executed in real-time and the price expected by a trader before executing the order. Considering rapid price changes, the slightest delay or slippage may lead to profit loss as well.

Factors that Influence Latency

We have already started discussing some of them. However, let’s have a closer look at major factors influencing latency to keep them in mind when choosing or testing a broker:

  1. Internet Connectivity – everything is quite clear here. Poor connection leads to latency issues no matter if you trade, watch a movie, or simply surf the net. Regular ping tests are recommended.
  2. Local Hardware – the overall hardware performance also matters. While online technologies evolve, they may require more resourcefulness from your laptop or CPU.
  3. Forex VPS – hosting performance is one of the most important factors. It is responsible for not only order execution but the entire trading platform functionality. VPS may come as a good solution to poor server performance. However, it is a matter of the broker to provide VPS access. If it does not, traders have nothing to do with that.

Conclusion

Latency defines the speed of order execution and influences the overall trading system performance. It can be influenced by various factors. Some of them can be controlled by a trader (for example, proper hardware maintenance and control over Internet connectivity). Others solely depend on a chosen broker.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.