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Questions about stop loss (it is related to the execution order on the broker's server ), also a bit discussion between MT4/MT5)

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Wjack07
69
Wjack07  

Hi:  

I am not sure if I understand stop loss and how brokers' server deal with trade correctly, hope anyone can confirm it or point out my mistakes.
There is also an issue about MT4 / MT5 operation.
To make things understandable, I make two scenarios following, each one with their comments. (I might make some mistakes, if so, please correct me.)

*In each scenario, assuming the volume of every order is 1 lot.
--
< Scenario 1 begins>
12:00 Market prices for symbol X are 100/99 (Ask/Bid).  
Trader A places an Ask order on X (successfully executed @100), and then set up a SL @ 98.  
At the same time Trader B places an sell-stop order with entry price @ 98.
Trader B's order enters into the liquidity pool (also becomes part of the market depth), but Trader A's potential deal close (SL@98) hasn't been triggered, so it is not in the liquidity pool.

12:10 Symbol X faces a significant drop, and massively drops to 91/90.
During the dropping, Trader A's order on symbol X with SL@98 was triggered, and its close order was sent out to the broker server.
However, there might be many orders already waiting ahead of it (first come first served).
So it is possible that Trader A's order on symbol X close at 97, 95 or even lower. (Depends on the available liquidity)
The result is Trader A might face a big slippage.

However, Trade B's order on symbol (sell-stop@98) was already in the pool, so it was waiting for executing before the dropping. No matter what caused the significant drop for symbol X, Trader B's order needs to be executed before the market can keep dropping. 
Therefore, Trader B will get his order done at the set price, and face no slippage.

Comments
The better way to set up a SL is NOT to set up a SL directly, but by setting up another order. (Imagine Trader A and Trader B are the same person.)

--

< Scenario 2 begins>
12:00 Market prices for symbol X are 100/99 (Ask/Bid).  
Trader A places an Ask order on X (successfully executed @100), and then set up another sell stop order @ price of 98.  
At the same time, Trader B does the same thing.
The only difference is Trader A is using MT4 while Trader B is using MT5.

12:10 Symbol X faces a significant drop, and massively drops to 91/90.
Because both Trader A&B 's sell stop order are already waiting in the liquidity before the dropping happens, so their orders are executed at the set up price even market faces a big jump (or the market cannot keep dropping)

However, Trader A now has two positions while Trader B has no position at all. 

Comments:
In trader A's case, he successfully uses placing sell-stop (rather than SL) to avoid slippage, but he got two left positions.
If trader A didnt manage to close them on the same day, he will be charged by swap.  
Also, by closing two positions, trader A needs to pay commissions.
In terms of commission trader A paid twice on opening and twice on closing (four times in total).

On the other hand, trader B has no left position (MT5 will automatically accumulate the positions.), so he doesnt need to worry about the swap.
Also, in terms of commission, he just paid twice (one in one out.)

--

If someone can comment on my thoughts, that would be helpful.
Wjack

Rodrigo Malacarne
Moderator
9951
Rodrigo Malacarne  
Wjack07:

Hi:  

I am not sure if I understand stop loss and how brokers' server deal with trade correctly, hope anyone can confirm it or point out my mistakes.
There is also an issue about MT4 / MT5 operation.
To make things understandable, I make two scenarios following, each one with their comments. (I might make some mistakes, if so, please correct me.)

...
If someone can comment on my thoughts, that would be helpful.
Wjack

Hi Wjack07, I see several conceptual errors on what you wrote... I'm out of office right now (writing from cell phone), so I cannot write in a detailed manner... However there is one thing I would like to clarify right now: you might get slippage when working with sell stop orders (this is also valid for buy stop orders). So if you are really interested on avoiding slippage you have to work with sell stop limit / buy stop limit orders... Anyway in this case you face the risk of no execution of your order. So, unfortunately if you want to set a SL on your strategy then the best option is to work with sell stop / buy stop orders and face the slippage risk.
Wjack07
69
Wjack07  
Malacarne:
Hi Wjack07, I see several conceptual errors on what you wrote... I'm out of office right now (writing from cell phone), so I cannot write in a detailed manner... However there is one thing I would like to clarify right now: you might get slippage when working with sell stop orders (this is also valid for buy stop orders). So if you are really interested on avoiding slippage you have to work with sell stop limit / buy stop limit orders... Anyway in this case you face the risk of no execution of your order. So, unfortunately if you want to set a SL on your strategy then the best option is to work with sell stop / buy stop orders and face the slippage risk.
Hi Mlacarne:

Thank you for replying.

I think I understand better now (not sure if fully).

Firstly, I think if retail traders' orders enter market depth depends on the system, an ECN system should support that and allows all the participants to have their influence on the liquidity pool.
(like what FXOPEN claims, https://www.youtube.com/watch?v=lOT4wBR8qf8)

BUT, I still made conceptual mistake.
Even a sell stop order is placed in the market, the market can still jump across that price without filling it (just like suddenly no one wants that price. The price change is not continual, and this can happen on some big news), so slippage happens.
For the limit order, it has no slippage because when it happens, the order will be rejected (no execution at all, and this might not be a good thing in some case.)

So the slippage is possible for sell stop , that was my conceptual mistake.

--

However, I am still not sure about the difference between stop loss and sell stop.

In stop loss case, is it a pending (but hidden) sell order (*assuming it is a long position)?
Or setting a stop loss will also shows on the market depth as a sell in the liquidity pool?

If SL is not in the liquidity pool, sell buy still has its advantages on possible execution compared to stop loss.
ex: If SL is not a pending order in the pool, but only triggered from the client when the price hits, then there might be many orders ahead of it waiting when it arrives the server. On the other hand, a sell stop order is already waiting in the queue.
in this case, it seems to me that we should always use sell stop rather than SL, although we still need to be aware of the possible slippage.


(Not sure if I still have some misunderstanding)
Many thanks
Wjack
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Alain Verleyen
Moderator
31184
Alain Verleyen  
Wjack07:
Hi Mlacarne:

Thank you for replying.
...

It's a very interesting topic.

Theoretically, with MT5, there is no difference, on execution point of view, between a stoploss and a stop order. You can have slippage in both case. However it's difficult to check how it's managed in practice, as you can only see what happens on client side.

The main difference is a stoploss apply to the full position, instead, with stop orders (sell stop/buy stop) you can realize partial close of a position. Your question about the orders book is also very interesting, but it's not easy to answer, how to check ?

Wjack07
69
Wjack07  
angevoyageur:

It's a very interesting topic.

Theoretically, with MT5, there is no difference, on execution point of view, between a stoploss and a stop order. You can have slippage in both case. However it's difficult to check how it's managed in practice, as you can only see what happens on client side.

The main difference is a stoploss apply to the full position, instead, with stop orders (sell stop/buy stop) you can realize partial close of a position. Your question about the orders book is also very interesting, but it's not easy to answer, how to check ?



I think one way to go is to ask brokers ( I have emailed my broker, to see what is the answer) (Oh, but maybe what brokers say is not fully reliable?)
If stop order does have the execution advantage (queuing in the line earlier than SL), then I think SL should be abandoned (who wants to use the less beneficial one ?)
Whether this is true or not should be related to brokers' operation.
Just that if it is a true ECN, stop order should have this advantage. (But again, it is hard to 100% sure if that is true ECN, even if most ECN brokers claim so.)

Another way to do is to place an order with SL together with a stop order. Then wait until both are triggered, and compare.
Its difference (if there is any) will be quite obvious in a fast moving market (maybe do so during the news time).
I probably will do this test. Just wondering if anyone has some different opinion.

Many thanks
Wjack.

Rodrigo Malacarne
Moderator
9951
Rodrigo Malacarne  
Wjack07:



I think one way to go is to ask brokers ( I have emailed my broker, to see what is the answer) (Oh, but maybe what brokers say is not fully reliable?)
If stop order does have the execution advantage (queuing in the line earlier than SL), then I think SL should be abandoned (who wants to use the less beneficial one ?)
Whether this is true or not should be related to brokers' operation.
Just that if it is a true ECN, stop order should have this advantage. (But again, it is hard to 100% sure if that is true ECN, even if most ECN brokers claim so.)

Another way to do is to place an order with SL together with a stop order. Then wait until both are triggered, and compare.
Its difference (if there is any) will be quite obvious in a fast moving market (maybe do so during the news time).
I probably will do this test. Just wondering if anyone has some different opinion.

Many thanks
Wjack.

Hi Wjack,

this is a really interesting idea !!! Please let us know if you've found anything interesting! 

Wjack07
69
Wjack07  

Hi:

I got my broker's reply, and here is (at least in their system*) how it should work:   *My broker uses Duka's liquidity pool, and use MT4 bridge to Duka.

The execution follows the FIFO (first comes first out) principle, and the priority depends on when the order arrived.

So the SL will be triggered for its attached order, and its execution priority depends on when the order was set (compared to other waiting orders).

It is the same for a sell-stop order.

The difference is (in my scenario mentioned earlier):
in the single order with a SL case (let us call it order A1), the serve will only see one order, and executes its SL(or TP) when the price hits.
in the order (let us call it order A2) with another sell-stop order case (let us call it order A3), the serve will see two orders, and executes A3 when the price hits.
The priority of A1 and A3 depends on which was set up first.

Besides this factor, there are another two interesting factors.

1. any modification (for SL/TP or for the entry price of sell-stop) will make the order lost its original priority. this order will re-queue again from the end of current queue (It is like it becomes a newly come order).
2. on the server's perspective, a SL is a pending order, so it does enter into market depth. So changing SL is the same as changing the entry price of a sell-stop, both of which effect market depth.

---

I think it might depends on brokers.
Above is (if not all) one of the cases, which makes sense to me.

Hope this helps

Regards
Wjack

 

 

 

Rodrigo Malacarne
Moderator
9951
Rodrigo Malacarne  
Wjack07:

Hope this helps

Regards
Wjack

Thank you very much for all this information!

Very clarifying!

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