Trades on a Rollover involve a high degree of risk and you should take precautions to avoid it. For more information, see below.
Market Open/Market Rollover
It is important to be aware of the market rollover period and how it may affect your trading.
Daily market rollover occurs at 00:00 (GMT +2) and represents a period in the trading day when the interbank market is less liquid as market participants stop setting prices for daily transaction processes. During the carryover period, liquidity in the underlying market is significantly reduced as banks reconnect to the trading session. Accordingly, spreads on all currency and metal products noticeably widen at this time as compared to the more liquid periods during the trading day. A general period of increased market volatility persists until a more stable price flow from liquidity providers is restored, typically 30 minutes to an hour after the switch.
In addition to widening spreads, traders can also expect volatile market movements and price gaps that are not normally seen during the trading day. While some may view this as an opportunity, this period is fundamentally risky during the trading day and open positions may suffer from increased volatility. As a measure of protection against the unpredictable pricing typical of the rollover period, NDDFX introduces a daily 3-minute trading break from 11:59 pm (GMT +2) to 00:02 pm (GMT +2), during which orders cannot be placed and existing orders cannot be executed during this time. The market rollover period is not something unique to NDDFX, it is a broader market phenomenon and a reality of trading in the interbank market.
Stop Loss/Take Profits/Limit Orders
Global Prime’s limit orders function as ‘Triggers’ in contrast to guaranteed limit orders. This means that when the market reaches the stop-loss or take-profit level, the system will trigger the order into the market, and it will be filled at best available price in the market. During normal market conditions, limit orders are generally filled at the requested limit price however, during roll-over as a result of the reduced liquidity, stops and take profits can be filled at significantly different levels then what has been requested.
Why? The reason is due to the lack of liquidity in the underlying market which means there is not many participants pricing around this time. Therefore, if the limit order or stop-loss level is reached and the order is triggered, the requested price may no longer be available which can result in adverse or partial fills, VWAP’s and slippage.
In a time like market roll-over where spreads are wider than usual, the next best available price may not necessarily be a favourable price for traders and there is a chance that they can be filled at a significantly worse price than the price limits that they have set. Accordingly, traders should be aware of this when leaving positions open and opening new positions during the market open and roll-over periods and take steps to mitigate the potential for adverse fills, volatility, and slippage.
Market Liquidity: Major Pairs v Minor Pairs v Exotic Pairs
You will notice that FX products can be divided into three categories on your trading platform:
Major FX pairs
Minor FX Pairs
Pairs of exotic FX
These three categories are fundamentally different in that they trade with different volumes.
Major pairs trade more often than exotic or minor pairs. Liquidity providers will offer price competition if a pair has a higher trading volume to meet this demand. Major pairs that are extremely liquid can be traded in large volumes without affecting the exchange rate. This increased demand has a nice side effect: lower spreads and less volatility. The most popular pairs are EURUSD, AUDUSD and USDCAD, with average spreads 0.16, 0.28 and 0.67, respectively.
The minor and exotic pairs, on the other hand, are traded less often than their major counterparts. It is important to remember that there can be a significant volume difference between exotic and minor pairs. Exotic pairs, such as EURCAD and AUDCAD, have a higher trading volume than exotic ones like EURSEK and USDZAR (average spreads of 27.76 and 85.04 respectively). These pairs are more in demand than they are sold for, so spreads tend be wider to offset the possibility that a buyer will not come along quickly. These markets are more susceptible to price fluctuations and price spikes due to less competition and trading activity.
Spread differences can have a significant impact on market liquidity, such as Market Rollover. You can expect spreads to be narrower or wider as pricing is lower than usual, and spreads to be significantly larger or smaller.
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Depth of Market (or DoM), is a popular one that allows traders to see market liquidity. This refers to the number of trades on the market at what price.
Market liquidity is an important aspect for traders. If there isn’t enough liquidity in a market to match your orders your orders will be slipped or filled at higher or lower prices than you intended.