Slippage regarding forex trading is most simply defined as the gap between the price at which a trader expects to get into a specific pair or out of it and the price that is impacted in the market. It occurs when there is a high volatility of an asset, and the order will not be completed at the stated price range.

It can occur anywhere in any market; however, the fast time-sensitive characteristic creates it as one of the problems that prevail in the forex market. Most traders, trading on CFD trading, will most likely encounter slippage every time they place orders. In this article, let’s learn what slippage is and how to prevent it.

So, let’s get into it!

What is Slippage?

Slippage is a typical situation that takes place for different trades on some forex exchanges. It is the disparity between the price indicated on an order placement and the price that is affected in the market. This happens because the market changes can be more amplified in a short period especially when the market’s impact is high. Hence, your trade might be executed at a price other than what you have anticipated.

Volatility in the markets is the main cause of slippage. This is where prices of currencies tend to fluctuate very rapidly. It may be frustrating but is a part of normal trading in the foreign exchange market.

For instance, you have set your target price for a given instrument or a pair, like the EUR/USD pair at 1.1200; before this, your order could get executed when the price already moved to 1.1202. The difference is two pips and this is slippage.

How Do Slippages Arise?

Slippage can happen at any time during trade. This mostly happens at the moment when the rate of change of prices is high, and this is triggered by fluctuations in the market.

Some of the main reasons for slippage include:

1. Market Volatility: Fluctuation can be precipitated by any major news release, an economic report, or any other event that might trigger the price change in the shortest time possible. During these events, it becomes very hard to trade at the expected price leading to slippage.

2. Low Liquidity: It is expected that slippage is greater where market liquidity is relatively low. In this context, liquidity refers to the capacity of an asset to be traded without any modifications of the price level. The slippage of the asset tends to happen when there are no sufficient buyers and sellers at the concerned price.

3. Order Types: Some kinds of orders are much more likely to suffer slippage than others. For instance, market orders that deliver the price of the easiest available provide risk slippage compared to limit orders that describe a corresponding price for order execution.

4. High-Impact News Events: Fluctuations in price occur mostly from announcements made in news events, which may be interest rates, economic figures, or political events. When such gaps happen they may be exploited as the market shifts from one level to the other almost instantaneously.

5. Execution Speed: After order receipt, slippage may be impacted by the time taken to process the request.

How to Prevent Slippage In Forex Trading?

Here are some effective strategies to avoid or reduce slippage in forex trading:

1. Use Limit Orders: Limit orders over the usage of a market order were one of the best practices that could help prevent any slippage. Your order will only be completed when the market gets to that price. This helps you not to get your trade filled at an unwanted price.

2. Trade During High Liquidity: Most problems associated with slippage are observed in periods of low liquidity. Thus the best way of cutting down slippage is by trading most of the time when the market is active like when New York or London markets are open. Such time tends to have relatively better liquidity hence, smaller fluctuations in prices.

3. Avoid Major News Events: A high number of news events brings about high volatility and thus high slippage experience can occur. If you are aware of an upcoming news release it may be prudent to refrain from entering trades in the time leading up to the news release or prepare for slippage. Some traders employ an economic calendar to help them with their trades as the events are much more planned out.

4. Use a Reliable Forex Broker: Some of the ways to minimize slippage include; selecting a good reliable broker in the forex market with a good reputation. The nature of the platforms like FXcess ensures low spread and high liquidity that reduces chances of slippages. One should select a broker who has tight spreads and who executes the trades at high speed.

5. Set Stop-Loss Orders: Another method of risk management is stop-loss order in order to defend the investor from too much slippage. This order just like stop loss seals your position at your desired level so that in case the price turns against you, you will not lose much.

6. Trade Smaller Position Sizes: When you trade in smaller positions this minimizes or rather avoids the occurrence of slippage. This may not eradicate slippage but it can probably reduce its monetary losses.

Conclusion

Performance loss is normal when trading in the forex market. It happens when you get your trade done at a price other than the one you had originally set your mind on getting. While slippage is nearly inevitable, there are measures you can take to optimize this.

Some of the best ways of managing slippage include the use of limited orders, trading during times of high liquidity, and trading with an efficient broker such as FXcess.

FAQs

1. Can you contrast slippage and price gap?

While slippage takes place between an extremely fast price change within the hours of trading, a price gap describes the price jump between two prices at the time of closing during the trading interval and the opening session after a certain news product or event.

2. Does slippage impact a trader’s outcomes?

Yes, slippage may vary trading outcomes and bring more or less profit. It is crucial to ensure that slippage is controlled to its maximum possible extent.

3. Are liquidity violations normal in the forex market?

Technically, slippage is normally unnoticed in the forex trade because it normally happens in high volatility or during extremely significant news releases.

4. Is slippage only applicable in forex trading?

No, slippage can happen in any type of market such as stock, commodities, or CFDs. It is not exclusive to forex.

5. How can I check slippage on my trades?

Slippage can easily be measured on most trading platforms like Metatrader 4. Here, traders can make changes as and when necessary.

Disclaimer:
This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. FXCess is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication