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Slippage in Forex
Written by: PaxForex analytics dept - Tuesday, 10 May 2016 0 comments
The difference between the expected price of a trade, and the price the trade actually executes at is called a trading slippage. When you are trading forex, sometimes you will notice a slight difference between the price you expect and the execution price (the price when the forex trade is completed). When this happens, it is known as a slippage. It’s a common thing to experience as a forex trader and it can work either positively or negatively.
The main reasons for slippage are the forex market volatility and execution speeds. When a market experiences high volatility it generally means there’s low liquidity and market prices fluctuate very quickly. Where this affects forex traders is when there’s not enough forex liquidity to fill an order at the requested price. When this happens, the liquidity provider will complete the trade at the next best price.
Slippage tends to result during times of great volatility, and also in response to fundamental events like reports being filed, etc. Slippage almost always happens when the market opens each weekend on Sunday nights. Sunday nights are unpredictable—in general this is not a good day to trade. If you do place a forex trade which you are going to hold over the weekend, or set up for a trade on the weekend which might get triggered when the market opens again, compensate for that potential slippage.
The foreign exchange market is huge, fast and liquid, so there is very little slippage compared to other markets. That said, slippage does tend to occur during volatile period or before and after important news events like economic releases. This is because traders pull back and the volume shrinks, meaning some trades are not being executed at the specified price because the number or buyers and sellers has temporarily decreased. Some slippage may be due to a broker error – intentional or not – but these cases are rarer than most traders think.
Types of Slippage:
This “positive slippage” practice is common in the stock markets, but is quite new in forex. The continuity of trading in forex makes these cases less common than with stocks, but as we’ve seen recently, weekend gaps happen many times. For example: You place an order to trade at 1.3150. Positive Slippage occurs when your buy trade is executed at 1.3120 (giving you an additional 3 pips in your pocket).
A negative slippage on its own does not determine profit or loss, although it determines a fall in profit expectations of the trader. One can casually say that slippage only affects the profit levels of an investor and does not contribute to a profit or loss event in itself. For example: You place an order to trade at 1.3150. Negative slippage occurs when your buy trade is executed at 1.3180 (taking away 3 pips from your intended entry price level).
Can slippage be avoided?
Regardless of the forex broker you trade with, slippage
is something that a trader will experience at some point in their trading journey. Contrary to general opinion, slippage doesn’t indicate that your broker is playing tricks on you (although it is possible with Market maker brokers). In order to know how to avoid slippage in forex , it is essential to understand the market conditions under which slippage occurred. It is perfectly normal to experience slippage during important news releases such as the US NFP data or Central bank interest rate changes, where volatility and wild price swings are part and parcel of the trade.
While slippage shouldn’t really be cause for concern, traders can ensure to avoid slippage as much as possible by ensuring that trades are triggered either before or a few minutes after a news release happens. Although this can ensure that you are not a victim of slippage, depending on where your stops and limits are place, it could be possible for price to move in either direction and just take out your trade (either at a bigger stop level or at a higher take profit level).
Obviously, due to technological reasons, there will always be some slippage between the requested price and the execution price. Nevertheless, you should find a broker that allows trading with minimum slippage that will not kill your account. There are some great tools on the web for comparing slippage and performance. You can also avoid large slippage in your current broker by not trading while high impact news is released or during 'dead' hours.
On a related note, you can set up most broker platforms to show you the spread. This should help you to understand spread and slippage better and thus make better trading decisions. Spread widens and shrinks in different market conditions—during volatile ones it tends to widen (which is how slippage usually occurs). By setting your charts to show this spread, you’ll be able to visually see the days of the week and the times at which the spreads widen the most. Then you can compensate in the future by following the previous suggestions to avoid slippage in forex outright or work around it.
While a trader may end up paying more for a currency as a result of slippage, the opposite can also occur. The price may move down between the time he/she enters the order and the order is executed, resulting in a more favorable purchase price. In theory, there is a 50-50 chance that the price will move either in favor of or against the trader as a result of slippage. Whether the trader wishes to take this 50-50 chance or would rather avoid unfavorable slippage but instead take the risk of no execution of the trading order depends on the trading strategy.
Do some forex brokers deliberately make money through slippage? Probably, but slippage is a fact of life, even with good forex brokers. It’s best to learn to deal with it than to complain and blame someone else for your failure. There are bad brokers out there though, so if you’re concerned you might have one, look up their ratings and find out about other traders’ experiences.