In financial trading, slippage is a term that refers to the difference between a trade’s expected price and the actual price at which the trade is executed. This normally transpires during high periods of volatility as well as periods whereby orders cannot be matched at desired prices.
Slippage in forex tends to be seen in a negative light, however this normal market occurrence can be a good thing for traders. When forex trading orders are sent out to be filled by a liquidity provider or bank, they are filled at the best available price whether the fill price is above or below the price requested.
To put this concept into a numerical example, let’s say we attempt to buy the EUR/USD at the current market rate of 1.1427. When the order is filled, there are three potential outcomes: no slippage, positive slippage or negative slippage. These are explored in more depth below.
Examples of Forex Slippage
The order is submitted, and the best available buy price being offered is 1.1427 (exactly what we requested), the order is then filled at 1.1427.
The order is submitted, and the best available buy price being offered suddenly changes to 1.1417 (10 pips below our requested price), the order is then filled at this better price of 1.1417.
The order is submitted, and the best available buy price being offered suddenly changes to 1.1437 (10 pips above our requested price), the order is then filled at this price of 1.1437.
In this the trader loses value, as the executed price is worse than the expected price.
Measures to prevent slippage.
Although it’s impossible to predict the amount of slippage, it’s possible to take some measures to prevent it.
1. Don’t Trade in Times of High Volatility
High volatility occurs in times of important economic events, news, and rumors. The first thing you should do is to avoid the market in times of notable economic releases. The list of important economic events is available via the economic calendar. You must have observed, during news release the price tends to move very impulsively and many times we see that the spreads are too widen and sometimes it even forms gaps.
When there is high volatility in the market the price tends to change very quickly and so sometimes it is hard for the broker to execute your trade at your desired position. And so your trade is executed at the next available position. If a trader has already taken a position by the time the news is published, they are likely to encounter slippage on their stop loss, accompanied by a much higher risk level than they expected.
In day trading, it is best to avoid placing market orders during important scheduled financial news events, like FOMC announcements, or when a company is announcing its earnings.
2. Don’t Enter Low-Liquidity Markets
Liquidity depends on the asset you trade and trading hours. The major pairs, such as EUR/USD, GBP/USD, USD/JPY, USD/CAD, AUD/USD, NZD/USD, and USD/CHF, have the highest liquidity. While rare pairs, such as USD/TRY, USD/MXN, are traded less often, thus, the liquidity is lower.
When there is low liquidity in the market, there are not enough buyers and sellers present in the market to fill your order. And as in forex, the price tends to move continuously, the broker executes your trade at the next possible price. Due to this very reason, your trade gets executed at a different price rather than opening at your expected price.
As for the best trading hours, they depend on the asset you trade. Every market has trading sessions. In Forex, we are looking at Australian, Asian, European, and American sessions. For example, the Australian dollar will have high liquidity during Australian and Asian sessions because traders in those regions are more interested in AUD that is used for financial operations than in GBP.
3. Use Limit Order instead of Market Order
Slippage is a result of a trader using market orders to enter or exit trading positions. For this reason, one of the main ways to avoid the pitfalls that come with slippage is to make use of limit orders instead. As in limit orders, the slippage will be less in high volatile times when compared to market orders.
Can We Stop Trading Slippage?
It’s impossible to remove the slippage entirely. Every trader has experienced slippage at least once in their trading career. Although it’s possible to check significant economic events and avoid trading during them, there is no chance to predict unexpected news and rumors. Markets are driven not only by fundamental factors but by the market participants who form the market sentiment. It’s impossible to fully remove the slippage.
Recently, world central banks have been holding unscheduled meetings and cutting interest rates due to the corona virus pandemic. Such events are unpredictable and not placed on the economic calendar. Thus, traders can’t predict them and place either a limit order or avoid trading at all.
Slippage is an integral part of trading along with spread, swap, and commission. Slippage is a normal fact of life for currency traders that should be expected. Although it’s impossible to get rid of negative slippage, it’s possible to reduce its impact. It’s particularly an issue in volatile trading environments where prices move quickly over a broad range. However, there are tools and strategies available that can help mitigate the problem presented by slippage. Traders should take these into consideration in order to minimize unnecessary losses in trading.