Like in most financial markets, the forex market is a fast-moving market that requires traders to be on top of their game.
Prices can change from minute to minute, second to second, and sometimes in milliseconds bring either pressure or good tiding to traders.
For smart traders, the price volatility is often good news, as profits can never be made if the prices remained the same.
Because of the volatility nature of the FX market, a common occurrence in the life of traders is slippage.
Slippage in Forex
Slippage is what happens when currency prices fluctuate when a trader is placing their order, causing them to enter or exit a trade at a price that is either lower or higher than they desired.
It is the difference between the price you see and the price you pay.
It is when a trader places their order at a quoted price, and their order gets filled at a different rate than the one that was quoted.
Slippage can sometimes have a minor effect on a trade outcome, while in other cases, it might be big enough to stop you from trading the moment you enter the trade.
You can lose or gain a lot of money through slippage, so it is something you need to know and understand to avoid it if possible.
For instance, you are looking to buy EUR/USD pair that has an ask price of 1.3650. As you press the execute button, you notice that the price got filled at 1.3652. This would be considered as slippage by two pips.
When an order is completed, three potential outcomes can befall the trader: negative slippage, positive slippage, and no slippage.
In an adverse slippage scenario, the trader seeks to buy a currency pair at 1.3650 but lands on the best available buying price being offered at 1.3660 (10 pips above the intended price). This will be categorized as negative slippage.
A trader submits an order, and the buying price suddenly changes to 1.3640 (10 pips below the intended amount). The order will be considered as positive slippage.
A trader submits an order at the best available buying price of 1.3650, and the order is filled at the exact price of 1.3650. This order will be considered as a no slippage order due to the price stagnation.
When slippage occurs, retail forex traders tend to blame their brokers for obtaining a different price than the desired rate.
Despite its negative effect, slippage acts as a confirmation for traders that they are not trading in an artificial market that can be manipulated by dealers and brokers. It confirms to traders that they are trading in a real market environment.
It is important to note that significant slippage frequently occurs in times of significant news events and political seasons. As a trader, it will be wise to avoid trading during major scheduled news events such as a company’s earnings announcement.
While the significant news events might bring forth alluring opportunities, getting in and out at the desired price might prove problematic.
How to Avoid Slippage
It is impossible to avoid slippage as it inevitably happens to every trader who is trading in either forex, stocks, or futures. However, it is possible to mitigate and minimize the effects of slippage.
If you are a trader, it is essential to, first of all, know whether you should be worried about slippage.
Long-term and medium-traders should not be worried about slippage as it does not pose a threat to their trading account.
However, day traders should be worried and should implement these recommendations to avoid slippage.
- Avoid Trading During the High Price Movement.
- Implement Pending Orders
- Put in Place Instant Execution Orders