How to reduce eroding Forex slippages? Slippage is more likely to occur in times of higher volatility (perhaps due to market events) and it makes a market order at a specific price impossible to execute. Such times are when large orders are executed, when market orders are used and when there is not enough interest at the desired price level to keep the expected trade price.
Slippage is neither negative or positive movements, it is simply the difference between the expected purchase price and actual executed price. Since the corresponding securities are bought and sold at the most favorable price available, an order can result differently. In this situation, most forex dealers will execute the trade at the next best price. In forex world, the market prices changes fast and the slippage happens in times of delay between the order placed and its completion.
Slippage is the difference between the expected filled price of a trade and the actual price filled. In other words, when your trade is executed at worse price than requested, so it is “slipping” from the original order price. It happens between the time that a trader enters the trade and the time the trade is made. It can happen to everyone in any given trading market; stock, currency, or commodity.
This may be caused by an ineffective broker, increased liquidity and fast market. The forex market is very liquid and there are limited amounts of slippage.
Forex slippage examples:
Positive slippage – an order executed in favorable result
Best available buy price was offered at 1.3440, and before order was submitted, the order price changed to 1.3430 (10 pips below), then the order was submitted at the price of 1.3440
No slippage – an order executed without any difference.
Negative slippage – an order executed in less favorable result
Best available buy price was offered at 1.3550 and before order was submitted, the order price changed to 1.3560 (10 pips above), then the order was submitted at price of 1.3560
When you enter a position: use limit orders or stop limit orders These order types will minimize the slippage, because you are setting up the price in which you would like to buy or sell. Preferably, you still need to plan your trade before using limit or stop limit orders while entering positions. Also, using limit orders means you are going to miss lucrative opportunity, but you will avoid slippage when getting into a trade.
When you exit a position: utilize both market order and limit order properly. If the trade is moving in the direction you expected, place limit order at the specific price. If the trade is moving in the direction you do not want and when you place stop loss, use a market order. By doing so, you will be immediately guaranteed to exit from the losing trade.
Aware of what’s coming
If you’re a trader, there are major news events and announcements that is worth noting in your calendar. FOMC announcements, a company’s earnings announcements, and etc. When these big events take place, you do not want to expose yourself to expected slippage. If you trade during major announcements and you get slippage on your stop loss, you’d be in unspeakable despair.
There are possible slippage occurrences when the market is thinly traded. When doing so, you should trade forex pairs with ample volume, so you can reduce the possibility of slippage. The most liquid and active time for most currency pair is when London and/ or the US market is open.
It is impossible to completely avoid slippage, but similar to spread or commissions, it is a cost you need to endure as a trader. Think of it as a small amount of token you pay for being the player in Forex.