What is slippage in Forex trading and how to avoid it?

Slippage occurs when the order execution price differs from the requested price. This occurs when market orders cannot be matched at preferred prices – usually in highly volatile and fast-moving markets that are prone to unexpected sharp reversals in certain trends. Any deviation between the executed price and the planned price is considered slippage.

Slippage can be zero, positive or negative and depends on whether the order is to buy or sell, to open or close a position, and the direction of price movement. Slippage occurs when a large market order is completed, but there is not enough volume at the order price to fill it.

For traders of the Forex market it is important to know what slippage in trading is and how it affects trading.

THE OCCURENCE OF SLIPPAGE IN THE TRADING MARKET

Forex slippage usually occurs during periods when the market is very volatile or market liquidity is low. Because markets with low liquidity have fewer participants, there is a large time lag between placing and executing an order. In volatile markets, prices fluctuate faster, even faster than order execution. Consequently, the price of an asset may change during the time gap, resulting in slippage.

Here are some reasons for slippage:

1. When trading Forex, slippage usually occurs on less popular currency pairs such as AUD/JPY, since very popular currency pairs have low volatility and high liquidity. For example, an investor decides to open a position on AUD/USD, a highly volatile currency pair, at a quoted price of $0.6025. However, the price could rise to $0.6040 during the period of time between sending and executing the order. The investor will experience slippage because he will be trading at a higher price than expected.

2. Slippage often occurs during or around major events, such as interest rate and monetary policy announcements, a company’s earnings report, or changes in management positions. These events increase market volatility, which can increase the likelihood that investors will experience slippage. When investors hold positions after markets close, they may experience slippage when the market reopens. This is because the price may change due to any news event or announcement that may have occurred while the market was closed.

MINIMIZING THE IMPACT OF SLIPPING

There are various ways in which an investor can minimize the impact of slippage. Some of them are as follows:

1. Trading markets with low volatility and high liquidity

Prices in markets with low volatility usually do not change quickly, but in markets with high volatility on the other side There are many market participants involved in transactions. Therefore, if investors trade in highly liquid and low-volatility markets, they can limit the risk of slippage.

Furthermore, the likelihood of slippage can be reduced by trading during peak periods, since liquidity will be highest during these times. This increases the chances of the transaction being executed quickly at the requested price. For example, the largest volume of transactions occurs in the stock markets when the major US stock exchanges are open. The largest trading volume in the Forex market occurs during the opening hours of the London Stock Exchange (LSE).

2. Use guaranteed stops and limit orders

Since an order with a guaranteed stop will be executed at the requested price, there is no risk of slippage. However, if it is triggered, there will be a premium associated with the guaranteed stop. Limit order can help reduce the risk of slippage when investors enter into a trade or seek to profit from a successful trade. When a limit order is activated, the order will be executed at the specified price or at a favorable price. This means that a sell order is executed at the desired price or a higher price, while a buy order is executed at the specified price or a lower price.

3. Check how trading providers treat slippage

While some providers will execute orders even if the price does not match the requested price, others will order as long as the price difference is within the investor’s tolerance level. Once the price difference goes beyond the acceptable level, the order will be rejected and will need to be resubmitted at the new price.

4. Use Forex broker NDD

Some traders see the reason for slippage as “intentional behavior of the Forex company.” No one knows if this is actually happening, but given the mentality, if you feel this way, you may want to change brokers. The type of Forex company you should choose is the so-called NDD (No Dealing Desk) Forex company.

In such a trading environment, traders’ orders are directly linked to the interbank market, so there is no conflict of interest between the Forex company and the trader. In other words, there is no point intentionally causing slippage. By the way, slippage can occur even when using the NDD method. However, since this is not intentional, it will be easy to remain calm even if a slip occurs.

5. Set the slip tolerance (or deviation setting)

We introduced the idea of ​​suppressing slippage, but in fact, in the ordering function there is also a function to force the elimination of slippage . This is a slippage tolerance setting feature (or deviation setting) that is implemented in the trading tools of many Forex companies. For example, if you set the slippage tolerance to 1 pip, the order will not be executed if the slippage exceeds 1 pip. Therefore, it is possible to make settings that do not allow slippage at all, but this is an extreme case. However, it is important to note that the narrower the slippage tolerance, the higher the likelihood of default. This is still good for new entries, but can lead to big losses if, for example, a settlement order you are trying to avoid during a sudden market change does not fill.

HOW TO FIND A LOW SLIPPAGE BROKER

• Research: Start by searching the internet for Forex brokers and make a list of those that advertise themselves as offering low slippage.

• Liquidity Providers: Check who their liquidity providers are. Top tier banks and liquidity providers usually offer better execution and lower slippage. Additionally, brokers with multiple liquidity providers tend to provide better services regarding slippage.

• Order Fulfillment Policy: Please review the Order Fulfillment Policy. It should clearly outline the process they follow when executing orders and state that they aim for as little slippage as possible.

• Technology: What technology do they use to execute orders? Some brokers use advanced technology to execute orders quickly and minimize slippage.

• Regulation: Make sure a reputable financial authority regulates the broker’s priorities. Regulated brokers are required to adhere to certain standards that protect traders. For example, we have rating of brokers regulated by the Central Bank of the Russian Federation.

• Customer reviews: read reviews of other traders. While these should be taken with a grain of salt, they can provide insight into other people’s experiences with platform slippage.

• Demo account: Use demo account to test the platform and see if slippage is acceptable. While demo accounts may not perfectly simulate real-life trading conditions, they can give you a general idea of ​​what to expect.

• Customer Support: Contact Customer Service with any questions. Their willingness to help and clarity of answers can be a good indicator of the quality of the broker.

• Transparency: Brokers must be transparent in their activities. They should be able to provide information about their slippage statistics or execution speed.

• Anti-slippage protection: Some brokers offer anti-slippage features, such as guaranteed stop loss orders, which guarantee that your trade will be executed at the price you set, regardless of market volatility.

CONCLUSION

Slippage is the difference between the expected price of a transaction and the price at which the transaction was actually completed. This can happen in any market, but is most common in fast-moving or illiquid markets. Slippage may vary depending on the type of broker you use. Knowing what slippage is on the stock exchange and Forex market helps a trader avoid unnecessary losses.

Different types of brokers, such as market makers, ECN (electronic communications network) brokers, and STP (straight through processing) brokers, may have different slippage levels. Market makers may have wider spreads and greater slippage potential, while ECN and STP brokers typically offer tighter spreads and less slippage.

One of the best ways to avoid slippage is to choose a broker from our rating of brokers licensed by the Central Bank of the Russian Federation.