Slippage occurs when the expected price of an order is different from the price at which the order was filled. Slippage is a normal occurrence during forex trades, and can either be positive or negative. Let’s take a closer look below.
The Definition of Slippage
In the forex market, buy orders are matched with sell orders. An imbalance in terms of buyers, sellers, and prices will result in slippage. Slippage is likely to occur when there is an imbalance in the market. Moreover, slippage is influenced by factors such as major news events and execution speeds of orders.
News events such as non-farm payrolls, central bank announcements result in high volatility in the market. Due to the fast price movements during the events, there is less liquidity in the market. Hence, the liquidity providers will fill the orders at the best price available. Execution speed is how fast your order can be filled at the expected price. Prices in the market fluctuate from time to time which is why a faster execution speed is important.
Effects of Slippage
1. Negative slippage
This is unfavourable to a trader. For example, in a buy order for GBP/USD at 1.3000, the best available price may be at 1.3010 which will result in a negative slippage of 10pips. In a sell order for GBP/JPY at 144.40, the order may be filled at 144.30 which results to 10 pips lower than the requested price.
2. Positive slippage
This type of slippage is in favour of a trader. For example, in a buy order for EUR/JPY at 129.85, the order may be executed at 129.80 which will lead to a positive slippage of 5 pips. In a sell order for USD/JPY at 111.20, the order may be executed at 111.30 thus resulting in a positive slippage of 10 pips. This gives the opportunity to earn more profits from the trade.
When it Does not Occur at All
This happens when an order is filled at the same price requested by a trader. For example, you submit a buy order for EUR/USD at 1.1630 which is filled at the same price.
Can You Avoid Slippage?
Unfortunately it’s not possible to always avoid slippage completely but you can take measures to minimise the chances of experiencing negative slippage. Here’s how:
- Ensure the brokerage firm has reliable liquidity providers to provide liquidity during high volatility.
- Use the Economic Calendar to check on the major news events. This helps traders to cease from trading during such announcements.
- Trade currency pairs that have large volumes and common among many traders. Take advantage of the London and New York Session overlap to trade since the market is most liquid and active during this time.
Final Thoughts
The perception that most traders have concerning slippage is that it is always a bad occurrence. However, it can be advantageous as in the case of positive slippage. Another important aspect is that it acts as a verification tool for traders. It shows them that brokerage firms are legitimate and run their operations in the real market without manipulating the trades.
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