What is slippage in trading?
Foreign exchange trading slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed. There is positive slippage, which is when a trader or investor gets a more favourable price, and negative slippage, when the trader gets a worse-than-expected price.
A small amount of slippage is a common market occurrence because the bid and ask prices of an asset are constantly changing.
Assume a buy order is placed. There are three possible outcomes:
No slippage – the trader buys the asset at the exact price expected.
Positive slippage – they pay a lower price than expected because the price dropped just before their order was executed.
Negative slippage – they pay a higher price than expected because the price rose just before their order was executed.
Slippage can occur on market, stop and limit orders. However, limit orders can cap the price being bought or sold at, which helps to reduce negative slippage.
Causes For Foreign Exchange Trading Slippage
“Slippage” It is a common occurrence in forex trading and can happen due to various reasons, including:
Market volatility: The forex market is a highly volatile market, and sudden price movements can cause slippage.
Liquidity: The availability of liquidity in the market can also affect the execution of trades and lead to slippage.
Execution speed: The time it takes for your order to be executed can also impact slippage. A slow execution speed can result in a larger difference between the expected price and the actual execution price.
Trading during news events: Economic news releases and other major events can cause sudden price movements and increase the likelihood of slippage.
To avoid forex trading slippage, here are some steps you can take:
Use limit orders: Limit orders allow you to set a maximum or minimum price at which you are willing to buy or sell a currency pair. This can help you avoid slippage by ensuring that your trade is executed at a specific price.
Use stop-loss orders: Stop-loss orders can help limit your losses in the event of sudden price movements. By setting a stop-loss order, you can automatically exit a trade if the price reaches a certain level, which can help you avoid slippage.
Monitor market conditions: Stay up-to-date on economic news releases and other major events that could impact the forex market. Avoid trading during volatile market conditions, if possible.
Use a reliable broker: Choose a reputable forex broker that has a fast execution speed and offers reliable trading conditions.
Manage your risks: Always use proper risk management techniques, such as setting a stop-loss order and avoiding over-leveraging your trades, to help minimize the impact of slippage on your trading account.
In summary, forex trading slippage is a common occurrence in the forex market. By using limit orders, stop-loss orders, monitoring market conditions, using a reliable broker, and managing your risks, you can help avoid slippage and protect your trading account.