Most Forex traders have heard of, or have experienced directly, the phenomenon of slippage. But only a few of them understand it thoroughly. In this article, we will provide you with a full explanation of slippage, and how it relates to your forex trading.
What is Slippage?
Slippage is the difference between the requested price of an order and the real price at which the order is executed. This phenomenon frequently occurs in highly volatile trading environments. Most traders see slippage as a bad thing, but there are several situations where it can also have beneficial effects.
To make this clear, consider a scenario where you submit a buy order on the EUR/USD currency pair at 1.3050. When this order is executed, there are 3 possible outcomes as follows:
- Outcome #1: No slippage
Your order is executed perfectly at 1.3050.
- Outcome #2: Positive slippage
Your order is executed but at the price of 1.3040, which means 10 pips lower than your requested price.
- Outcome #3: Negative slippage
Your order is executed but at the price of 1.3060, which means 10 pips higher than your requested price.
Whenever your order is executed at a price which is different from your requested price, that is slippage.
What Causes Slippage?
So why does slippage happen? The way a market functions is that the price will remain unchanged if the trade size of buyers and sellers is equal. Conversely, price will increase or decrease if there is an imbalance of buyers and sellers.
Let’s presume that you attempt to buy 1 lot EUR/USD at 1.3050, but there are not enough market participants (or no one at all) willing to sell their EURs at that rate; hence, your order will need to look at the next best available price. In this case, you get negative slippage.
Imagine the same example, but this time, there is a flood of market participants selling their EURs at the time you submit your position. There are likely to be lower rates than your expected one, and you can buy with a cheaper price. In this case, you get positive slippage.
It can be said that slippage can be friend or enemy but generally, it is still unexpected because you cannot control it in a positive or negative way yourself. What you can do is to keep tracking financial information and stay updated with market fluctuation, to get the deal you want.
In fact, the more liquid the currency pair is, the less chance of slippage there is, since there is always a dynamic balance between supply and demand or selling and buying volume. EUR/USD is a specific example of a liquid currency pair, thanks to the popularity and payment demand of both currencies. However, when the market gets volatile, which is often caused by some high-impact financial events, slippage can happen even with the most liquid pairs.
How to Avoid Slippage?
Below are several tips that may help you manage your order on your own and avoid slippage:
- You should avoid trading when volatility strongly picks up. The market often becomes highly volatile when an important economic data release, a sudden announcement, or breaking news come in.
- If you are a day trader, be careful trading when central banks announce their interest rate decisions.
- You should also pay attention to quarterly economic reports and forecasts. It’s a good idea to stay out of the market at the time those reports are published.
The Bottom Line
Slippage is a normal fact of life for Forex traders and often happens in volatile market conditions where the price strongly goes up and down. It’s not always a bad thing; however, traders often look to enter the market at their desired rates and don’t want to gamble with slippage.
In addition to using above ideas to avoid slippage, you can also eliminate it entirely by choosing a forex broker that offers zero slippage on their trading platforms and fast order execution.