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Slippage, gap and chop

2 Jan 2018,

When trading less liquid markets or trading outside main trading hours, you can meet some “bugbears”. What can actually happen?

 

 

 

 

 

 

Slippage

Let’s start with the very popular Nasdaq market. Imagine, you want to enter the market and when the price is on an attractive level, you press the BUY button. Instead of entering the trade at 25.50, as you have planned, you will get the worse price and enter the trade at 25.75.

You get slippage when opening the trade and enter for a worse price than you have planned. What is the cause? Especially low liquidity, when there are not too many active traders in the market, so if you decide to enter the market, it may take a while to find a counterparty that accepts the prize. Meanwhile, the price may rise by 1 tick and you are entering with a worse price.

To perform the trade, one trader must sell and the other must buy at the same time.

When do you meet slippage? Especially in intraday trading and when trading less liquid markets or when the fundamental news is announced. During the news, most traders are withdrawing from the market, liquidity is decreasing, and slippage is rising.

Gap

The German DAX index (in Metatrader marked as GER30, for example, depending on the broker) is probably the most famous market when it comes to gaps. The DAX trading hours are from 8.00 am to 4.30 pm GMT. That would not be so unusual if DAX could not open with the different price of more than 100 points.

Notice the “blank spaces” between the individual candles. The market can be closed at 4850 and opened in the morning at 4950.

Some traders make their strategies on gaps.

Gaps are often caused by fundamentals, for example, this is how the gap looked like last year when Brexit was announced. DAX opened 1000 points lower than it was traded the day before.

Although there was a fuss at that time around it, in the less than one month the market was traded at the same and higher price of 10317.

Chop

Chop is the name for market that moves to the side. As we already know, we can make the most money when the market is trending. So, Chop is not the ideal state of the market. Markets may be in a chop for more than a month, as do GBPUSD in 2015 – as shown below.

At a lower timeframe, we could find nice entry opportunities, but from the perspective of the daily chart, we can see the chop situation, where there is hardly any trading opportunity.

Some pieces of advice at the end:

  • Keep in mind that if the market gets to the chop just a few points before we hit Take Profit, we could lose a part of our profit because of a swap (fee for holding a position overnight).
  • In the intraday trading of the indices, always trade in the trading hours of the instrument to avoid slippage.
  • If you like the DAX, beware of gaps and do not stay in the positions overnight. You could be either very happy or very sad in the morning.

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