The real cost of chasing price after a data release: spreads and slippage

Execution conditions on the first move

At the moment a major release hits, market makers briefly withdraw quotes to avoid risk and then re-enter at wider spreads. Taking October as the example, US CPI was published on 12 October and PPI and retail sales on 15 October. At the instant of release, spreads on the major pairs can widen to three to five times normal, and slippage on stop orders rises noticeably.

Do the arithmetic

Assume a pair normally trades at a 1.0 pip spread with 10 dollars per pip on one standard lot. If the spread widens to 4.0 pips at the moment of release, the round-trip cost rises from 20 dollars to 80 dollars. If your target is 30 pips of profit (300 dollars), the cost share rises from about 6.7% to about 26.7%.

Then add slippage: if a stop actually fills 8 pips beyond the requested level, that is a further 80 dollars of loss on a single trade. Spread cost plus slippage can consume more than half of the expected return.

Why chasing also lowers the hit rate

Beyond cost, chasing has two further problems. First, the initial move is dominated by algorithms and high-frequency flow, and there is a systematic gap between the quote an individual trader sees and the price they get. Second, the direction after a release frequently reverses within minutes — the dollar index spiking on 15 October and giving back most of its gain into the close is a clear example.

Three alternatives

First, let the first hour pass and see whether price returns to the pre-release range before assessing direction. Second, use limit orders rather than market orders so the worst fill is capped at an acceptable level. Third, restrict event trading to a window from 30 minutes to 2 hours after the release, avoiding the initial liquidity vacuum.

Write the rule into the plan

State explicitly in your trading plan that no new positions are opened in the two hours either side of a data release, and that if you must participate you will use limit orders with a written slippage tolerance. The value of the rule is that it removes the need to make a fresh judgement at the moment of peak emotion.