The term slippage is a common term that you may hear when trading in the forex market or learning a new trading platform. Slippage in forex means the difference between an asset’s expected price from an ordered trade against the actual executed price. It often causes confusion and panic, but you can prepare yourself for this phenomenon with the proper knowledge.
This article will examine slippage in forex trading and how to protect yourself from losing assets.
Why Does This Occur?
Slippage in forex occurs when certain assets have increased volatility or during times of lower trade volumes. Market volatility occurs when a global event, say in the news or online, causes the prices to change quickly. The difference between the asset’s anticipated and actuarial price represents a ‘slip’.
Lower volumes are not always due to outside influence, but these events can still cause massive changes in price due to sufficient support to maintain a fixed price.
How Common Is Slippage?
Slippage in forex has lessened over time due to increased order execution speeds on the foreign exchange market. However, the rate of occurrence is still enough to be an issue.
When you begin trading, almost all the best forex broker choices attempt to negate its impact as much as possible. Many brokers adapt methods to execute orders or through specific features that directly combat it.
The Difference Between Positive and Negative Slippage
Since the word stems from “slip” which refers to movement, it can swing either way. Positive slippage happens when the asking price decreases before the order execution, while negative movement means an increase in the asking price.
For example, let’s say you’re trading GBP/USD, and the bid/ask price is 1.38/1.39. You expect to fill your order at $1.39. However, in the instance that it takes for the order execution to go through, the price suddenly drops to $1.385. Your trade finishes at a lower price, thus benefiting from positive slippage.
How to Avoid Slippage
The best countermeasure is to choose a forex broker that has fast execution speeds. This would reduce the amount of time between order and execution.
Strategize Order Types
Since slippage occurs when you entire a position with a market order, you have a small window for change even though the trade execution may still occur at a different price.
To avoid this, you can experiment with limit orders instead of the standard market order. Limit orders set a solid price point at which your order executes. They are a guaranteed way to save you from unexpected price hikes but risk having your order delayed.
Exercise Caution Around Market Events
Pay attention to global events as they could influence the forex market and cause higher volatility. Refrain from trading during this time unless you’re willing to take a risk. A stop-loss could help minimize damages when exiting a position during a volatile market.
The Bottom Line
There is no way to 100% avoid slippage in forex trading. Though the slippage can be positive, it is best to avoid slippage altogether to minimize risk.