What is Slippage and how can it impact your Trading Strategy?
Let’s get this straight and make sure there’s no confusion. ALL Funded Trading Plus evaluation accounts are NOT traded on Instant Fill Demo Accounts.
This article is written to help traders better understand the Funded Trading business model and how it may impact their trading style.
Table of Contents
Who Should Read this Article?
We believe all traders should have an understanding of how the funded trading business model works and should read this as part of their due diligence. We see a lot of “speculation” and uninformed guesses on how we and other firms work. These are often not very helpful.
Why this Article is Important for Scalping Traders
This article is of interest to all traders. CFD scalping traders are, however, more likely to notice “slippage” when trading a funded trading firm account. And they will not normally have had the experience of this type of “slippage” when trading their retail broker account. Traders with Futures Market experience will be more used to accepting fills at different prices from their expected execution.
What is Slippage?
Slippage is a retail trader’s term for a trade that has been executed at a price that is different from their market order, or expected trade entry. Slippage can be both positive and negative for a trader. A trade might be filled at a worse position or it can be filled at a much better position.
Slippage is normally statistically even. Traders will get as many positive slippage trades as they will get negative slippage trades. Traders tend however to emotionally respond to negative slippage at a much higher rate. This is a well researched psychological syndrome called Loss Aversion. Loss aversion can lead to anger and the need for an individual to blame someone or something else for their loss. Conversely, positive slippage is regularly seen not as “slippage”, it is instead interpreted by a trader as proof of their trading skill.
Retail CFD traders on normal broker accounts generally never get slipped in the market and this is because they are trading Instant Fill Demo Accounts with their broker.
What is an Instant Fill Demo Account?
“I‘m not trading a demo account with my broker, I deposited money with them!”
An Instant Fill Demo Account is an account that is not connected by a broker to a liquidity provider. It is not called a demo account by the broker; it will be labeled as a normal CFD account. The retail trader does not usually care or know they are trading a demo account.
Instant Fill Demo Accounts do not exist in the real money live markets. Instant Fill Demo Accounts were created by retail brokers in a highly competitive market to attract retail traders and to save brokers money. Instant fill demo accounts are never connected to real money. The broker carries the risk themselves and relies on the fact that the majority of the traders always lose.
If you have traded a broker account with your own money and you have had instant fills, then you can be assured that you were trading just at the broker level and not the real market. This is colloquially known as B-Book (broker book) trading.
Occasionally, a broker may decide to put a successful trader on their A-Book and send their trades to the real money market. These are generally longer term swing traders with very big accounts, with a proven track record, and who are basically costing the broker money.
Scalping traders are never put on the A-Book of a broker and this is because they statistically never make money.
Why do Brokers use Instant Fil Demo Accounts?
There are three reasons why retail CFD brokers use Instant Fill Demo Accounts.
- They save money
- They get to keep the majority of customer deposits
- They get to advertise the “advantages” of their accounts – instant fill, zero spread etc
The Main Reason: Broker Cost is Lower
CFD retail brokers who use Instant Fill Demo Accounts save a significant amount of money. Accounts connected to real liquidity cost quite a lot of money per account. Just ask a Futures Market trader how much they are charged for their price feeds each month!
Retail Trading Statistics
All retail brokers pretty much allow traders to do whatever they want on their Instant Fill Demo Accounts and they know statistically that in the end, the broker will always win. Consequently brokers do their best to attract as many retail customers as they can and use marketing tactics such as zero spread and instant fill to create their USP (unique selling proposition). Remember, the average retail trader is going to fall into the category of the 93 percent that lose.
The only traders that brokers have a problem with are the very few fast scalping traders – tick-scalpers who are successful. Normally these will be allowed to accumulate some profit and make limited withdrawals, despite the fact they have been on a demo account. If a withdrawal is higher than the deposit, the broker will often decide to invoke their terms and conditions, and these normally expressly forbid arbitrage and high-speed scalping.
Remember, it’s not possible for the broker to find liquidity in the real market for real high speed trading. This is reserved for the big institutions with high frequency trading arms located at the main service sites and connected to dark pools.
Funded Trading Business Types
In the funded trading business the objective is to find the traders that can do well and beat the retail loser statistic – and that’s the point of the evaluation. Consequently, the traders who are put “live” have proven themselves to be more likely to make money than the average retail trader. The choice for the different firms then is to decide if they want to accept all the risk themselves and continue them on an Instant Fill Demo Account or put their traders in the real live market. This is not a simple choice and different firms choose different routes.
The Demo Model
If a firm decides to take all the risk themselves, then it clearly becomes not in their best interest for a trader to do well. They need and want a few reasonably sized winners, this will help their marketing. But every withdrawal will be a loss to them. Usually these companies therefore have lots of rules and make it more difficult to pass their evaluations.
The advantage these firms have is that retail traders immediately feel comfortable in the trading environment, it’s the same as they have traded previously on their Instant Fill retail broker Account.
The biggest problem for these funded trading firms is the statistical outlier – the really big winner! Or a large number of winners at the same time. Is the firm big enough to absorb this cost or not? Some firms have failed spectacularly because of this.
The Live Funded Model
The other option for a funded trading firm is to place their successful traders in the real live market where they can make real money. But here’s the problem – the real live market trading conditions are nothing like instant fill demo accounts. So it’s not a great idea to test the traders on an instant fill demo account and then fund them on a real live market account. The failure rate of the live traders would be excessively high and this could cost the firm significantly. The better move is to make sure the evaluation accounts emulate the real accounts. Traders who then pass are statistically better placed to make money in the real live market.
A trader who has been placed in the real live market who wins large sums of money has actually won that money in the funded trading account and therefore can and will be paid out by the funded trading firm.
Risk Management Systems
Both types of funded business models use sophisticated risk management systems to monitor the trading accounts. These systems may hedge or copy traders at different times to ensure losses from traders do not impact the firm’s ability to deliver their service to their traders. These systems are constantly evolving and are proprietary to each firm. At Funded Trading Plus we have invested and continue to invest with our ongoing success, time, staff resource and money into ensuring we have the best Risk Management Systems in the industry at all times.
How a Real Live Funded Account Works
When the trader executes a trade on the meta trader platform, the signal for that trade is transmitted to the broker server. The broker server then sends that signal over a bridge to the liquidity provider and the trade order is matched with the nearest equal and opposite trade order available in the liquidity pool that the liquidity provider is connected to. The speed of execution of these trades is dependent on the availability of liquidity at the time of the trade and the minimum or maximum acceptable slippage rate set by the broker. The signal of the result of the trade is sent back to the meta trader platform.
The speed of execution is not particularly dependent upon the connection speed between the meta trader platform and the broker server. It’s the availability of the liquidity that largely determines the speed of execution.
The funded trading firm does not sit between the meta trader platform and the broker or between the broker and the liquidity provider. The funded trading firm measures the result of the execution after the execution at the broker server level. As such, the funded trading firm cannot and does not interfere with the speed of execution or quality of execution.
How an Evaluation Emulation of a Real Live Funded Account Works
As previously discussed, giving evaluation traders Instant Fill Demo Accounts is counter-productive and means unprepared traders would be sent to the live market where they will most likely lose money. Instead, at evaluation level, traders are given an account that emulates the real live funded trading accounts. At the broker server level, the trade execution signal is examined by the emulation algorithm and this looks for the matching liquidity in real time and completes the trade based on what would have been available to a real trader at that time.
- Funded Trading Plus places traders who pass their evaluation in the real live money market. All trades therefore have to find matching liquidity before they are filled. This can result in slower execution than retail traders are used to, and may result in slippage.
- The real live money accounts mean traders can be assured they will get paid if and when they make very large sums of money.
- Evaluation traders do not trade an Instant Fill Demo Account and instead trade an emulation account of the real live market.
- All traders need to be aware of how the funded trading business model works and how it may impact their potential for high income. They also need to build into their personal risk management trading systems that allow for slower execution times and slippage.
- Most sensible traders find that their trades are executed close to or at their expected price and have no problems with trading these accounts.
Specific Advice for Scalpers
If you want to trade a funded trading account with high leverage and fast execution, then you should test the execution available to you on our programs. You can do this via our shared demo account HERE
High leverage scalping trading is actually not very successful at broker level, even on Instant Fill Demo Accounts. All available broker data suggests scalpers do not, in the long term, make good profits. Many traders put a lot of time and money into making sure they have the fastest connection to the broker server as is possible, and pay for VPNs and super-fast PCs. The reality is, this makes very little difference. Looking at a faster speed available along the line of a VPN is a mirage, and it shows you the speed of the connection of the nearest VPN server to the meta trader server and completely ignores the speed lag of the transmission of that to you on the other side of the world. The physics remains the same. You are the other side of the world.
High leverage scalping trading is the most adrenaline driven trading of all, and this is why many traders want to scalp. The dopamine creation is high and the pleasure circuits light up when traders see high figures suddenly appearing before them. This then motivates them to master this skill and become a scalping trader. There is a big downside to this, however. This adrenaline and dopamine effect drives the emotions and as we know, emotions get in the way of good trading decisions. Emotions are more likely to make you over trade, revenge trade and take your anger out on other people instead of examining the fundamentals of your trading system.
We do have successful scalping traders on our live trading book and they are able to make a good living from trading. They are, however, taking smaller size trades in greater numbers and have solid trading psychology backing up their trading systems. The greater trade numbers at smaller sizes means that the slippage becomes statistically even and any larger slippage losses do not dramatically affect their draw down.
Please ask yourself the difficult question – are you actually a profitable scalping trader? Have you ever been able to regularly get paid by your broker or your funded trading provider at a rate that is greater than your deposit? Have you ever kept that up for a year or more. The trading business is not about last week’s profit, it’s about last year and and the year before and more importantly – it’s about the next year. Focus on this goal and adapt your trading accordingly.
Not Scalping Related Slippage
Slippage can affect trades at different times of the day and when there are specific events in the market. The reason for the slippage at these times will be a lack of liquidity available to match a trade execution. The liquidity may dry up entirely at times of high volume and this can be seen every time there is news in the market. The majority of the liquidity is immediately scooped up by the trading algorithms of the big institutions and it is impossible for our brokers to fill your trades at your expected price. This then results in a slippage event, often on a stop-loss order. This is not an error of the system. It is an error of the trader, not allowing enough space on their stops or not accounting for the fact that news was due.
At Funded Trading Plus we allow traders to trade through news, but many funded trading programs will breach you for trading over news. Please ensure you are aware of the news cycles that may affect your market.
All markets have closed times and open times each day. Please check the specific open and close times of every market you trade via the specification in meta trader. When the markets close there is no liquidity at all, trade orders cannot be executed and stop losses are meaningless. When liquidity returns to the market, and this can be some time after the reopening, trade orders and stop losses are filled at the next nearest price. This can result in large slippage. Again, this slippage is not a system error. It is an error of the trader, not allowing enough space with their stops and not accounting for the fact the market closed and reopened.