Slippage in forex is when a trader receives a different price than the one he used to submit his order when trading currency pairs. The main causes of slippage are lack of liquidity or highly volatile trading scenarios.
Every time you send an order to your broker, there is a whole array of things happening in the background. The broker needs to receive the order, verify if you have enough funds to open the order, and then place the order on the market.
While this sounds like a rather straightforward process, trading is the game of milliseconds and prices can change during that time – especially if the markets are volatile.
Slippage Explained
Slippage is the situation when the execution price changes between the time you input the order and the time the broker processes it. For swing traders or position traders who work over larger time frames, small slippage can be a mere inconvenience. However, for traders who trade high-frequency strategies (scalping), slippage can be the difference between profiting or losing.
Every trade has 3 types of slippage:
- Zero: There is no difference between the intended and executed price
- Positive: Price is better than intended
- Negative: Price is worse than intended
Right now you’re probably thinking about positive slippage, and yes, it’s a thing. Sometimes you can end up getting a better price than the one you submitted in your order.
Going back to our explanation, slippage occurs when there is no availability in the order book of exchange to fill a trading order at the particular requested price, hence, the importance of using the right trading orders if slippage can be important for you. Here are the most common:
- Market order: this type of order is the number one victim of slippage as it’s basically an instruction to execute an order at whatever price is available. This means that you can click to buy or sell at $72, but if the availability was $78, that’s what you get.
- Limit order: this type of order is the best one for traders looking to escape the slippery slopes of slippage as it guarantees a specific price. The only problem is that it doesn’t guarantee execution. This means that if you set a buy limit order at $45, and the price quickly jumps to $47, then you won’t have your order executed.
Example of Forex Slippage
You've been observing the EUR / USD, looking for an opportunity to buy because you believe that the US dollar declines in the short term.
You decide to enter the buy position at 1.13450, during the time when there is no scheduled news. Yet, at that moment, the President of the United States sends out a Tweet that causes significant volatility on the market.
In this scenario there are 3 possible options:
- No slippage: Your trade gets filled at 1.13450, just like you intended
- Positive slippage: Your trade gets filled at a better price, at 1.13420. This is 3 pips below your expectation. Since you were buying, expecting that the price will rise, this puts you at an initial advantage.
- Negative slippage: Your trade gets filled at a worse price, at 1.1348, or 3 pips above what you expected. This is above the level you were targeting and puts you at an initial disadvantage, reducing your potential profits.
How to Reduce Slippage
- Find a quality broker: The faster the information flow between the time when the order is placed and when it reaches the market – the less the slippage. For that purpose, use a broker with fast execution times that won’t slip you, or offer you a new price (also known as requoting).
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- Trade highly liquid currency pairs: Not every forex pair is the same. Major currencies like the US dollar, Euro, or British pound occupy the lion’s share of the market. Since they’re so popular, their liquidity vastly reduces the slippage risks.
- Trade during the prime trading hours: Just because you can trade forex at any time during the week – it doesn’t mean that you should. The best time to trade is when the trading volume is the highest. That happens during the London and New York session, and especially when they overlap.
- Avoid high impact news: News drive volatility. During the high-impact news like non-farm payrolls or interest rate decisions, price movement gets erratic, leading to an elevated possibility of slippage. For beginners, it is best to avoid news trading altogether. Checking the news calendar should be a part of the morning routine for every trader.
- Use other types of orders: Using limit orders can help to avoid slippage. While this is very helpful for stocks, it does work for forex too. When using a limit order you are giving the instruction for your order to be executed only at a certain price or better.
Conclusion
Slippage belongs amongst the trading risks, and it will always be a part of trading. Yet, while you cannot completely avoid this risk, you can cultivate habits that minimize it.
Selection, timing, and order types are some of the techniques that might help, but the first step should be to ensure that you trade with the quality broker that will do its best to execute your trades as fast and as accurately as possible.
Frequently Asked Questions
Does slippage make you lose money?
Slippage can work both ways. When you get a worse price than expected it is negative slippage and you will enter a position at a worse place than anticipated. But, sometimes you can get a better price than expected which is positive slippage.
Is slippage the same as a spread?
No, the spread is the difference between the bid (the best current buying price) and the ask (the best current selling price), while the slippage is the difference between the price at the moment of the order execution and the price at which the order is executed.
