What is Slippage on Forex?
Slippage is one of the unpleasant situations that can arise on the Forex market. In this article, we will discuss what it is, under what conditions it can arise and how to avoid it.
Slippage is a situation in which a stop order is closed at a price different from the planned value. Because of this, a trader can both earn additional profits and suffer significant losses. Why does slippage occur?
During periods of low liquidity on the foreign exchange market, for example, before the release of important economic news, the number of buy and sell transactions decreases. In order for you to close a trade, the counterparty must open an opposite position. If such a position does not exist, the trading platform will automatically close the position at the closest available price.
Slippage can be either negative or positive. For example, a trader opens a sell trade at 1.23661 and sets Take Profit and Stop Loss levels at 1.23640 and 1.23684. After the news release, a sharp price movement may occur. If the movement is positive, Take Profit can be triggered at 1.23633, which means the profit will increase by 7 points. However, the price can reverse and rise to the level of 1.23694, and in this case the loss increases by 10 points.
Imagine a situation: you open a trade, set a stop loss of 20 points, then important news comes out, and the price moves sharply against your trade. The stop loss is triggered, however its size is not the 20 points you have specified, but 50 or more.
Slippage is a fairly common market phenomenon that occurs under the following conditions:
- when Stop Loss and Take Profit are triggered;
- when Trailing Stop is triggered;
- when Sell Limit, Buy Limit, Sell Stop, and Buy Stop are triggered;
- when closing positions manually.
What are the main reasons why slippage occurs?
Strong volatility of a trading instrument. Strong fluctuations in prices occur during the release of macroeconomic news. Also, prices are unstable during the beginning and end of trading sessions. Market execution of orders can be delayed up to several seconds. When the price changes quickly, during this time the value of the quote may change.
Slow order processing. During a period of high trading activity, the terminal may not have time to process a large flow of orders from traders. The reasons may be poor connection between the broker and liquidity providers or unstable operation of the trading platform.
Broker's actions. It should be borne in mind that some brokers can create artificial slippage. This is mainly done by market makers, since they are the counterparties to their clients' transactions. Any additional loss traders incur will become profit for the broker.
How to avoid slippage?
Unfortunately, due to the specific nature of the Forex market, it will not be possible to completely prevent slippage, but there is a list of measures that can reduce their impact on the overall trading result.
- Use any appropriate risk management techniques. The lower the risk level planned by the trader, the lower the potential size of losses due to slippage.
- Use ECN brokers as they provide the fastest order execution.
- To mitigate risks, you can use locked positions. It should be borne in mind that hedging is a strategy used by experienced traders. If you do not know how to exit the lock correctly, you can only aggravate the situation and increase your losses.
- Use Instant Execution of orders. With Instant Execution, orders at available prices are executed instantly. If the price selected by the trader is not on the market at the moment, the system will offer to choose a different price, i.e. a requote will occur.
- During times of high volatility, you should close orders manually. Stop orders, such as Stop Loss or pending orders Sell Stop and Buy Stop, may not be triggered at the planned price and cause a loss due to the fast dynamics of changes.
- You should not trade during the publication of macroeconomic news that often causes rapid changes in quotations.
- To resolve disputes with a broker, it is better to take screenshots or videos. With evidence that the order was triggered incorrectly, the trader is more likely to have the issue resolved in their favor and receive compensation from the broker.
Slippage is a common occurrence on the Forex market. It occurs for a variety of reasons that a trader cannot prevent. A well-tuned low-risk trading strategy will help minimize the losses associated with slippage.
Article last updated: 2022-10-28