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What is Slippage - and How Can You Avoid It?

Posted by BluFX

 

What is slippage

Why does slippage happen in the first place? Simply put, it's because of forex trading algorithms or changes in market conditions. Slippage is the difference between the price you see on your screen and the actual price you pay for your trade. This post will go over some simple tactics on how to avoid slippage in forex.


Read: How to Find Forex Strategies to Suit Your Day Job ⟶


What is slippage?

Slippage is the difference between the price you intend to buy or sell at, and the price at which your trade actually occurs.

This may be due to the time difference between you placing an order and its execution. During this time, other traders have a chance to take an opposing position or hedge their risk. This can lead to your trade entering the market at a worse price than the price you expected.

  • Negative slippage means that the actual price at which a trade got executed differs from the price specified in the order.
  • Positive slippage indicates that the price at which a trade got executed is better than what you had specified.

The slippage idea may be scary new for some aspiring forex traders who are looking to start trading. Contrary to a popular myth, slippage might not always be accidental. It is possible to minimise it or even utilise it in one's trading systems.

Regular negative slippages may be a sign of bad decisions. If you execute an order at a price difference of more than 10 pips, it will significantly impact your net profits.

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How can you avoid slippage in forex?

A new report or piece of news hits the market, and price volatility ensues. If don't prepare for the rapid, unpredictable swings in price, slippage can occur. You can manage this by preparing yourself to react to sudden changes in the market. Here's how to avoid slippage in the forex market.

Want more risk management tips? Read 4 Essential Risk Management Tips...

4 tips on avoiding slippage

Use limit orders, not market orders

You've probably heard that you should place your trades using a limit order rather than a market order. This is good advice, but many people don't know why they should do this. A limit order does execute your trade orders at the intended price or fair market value, and they are also time effective. Market orders may not execute orders even at the best prices.

The execution of a limit order is not guaranteed; in fact, you may never get the exact price you are targeting if it is a very liquid market or a volatile market. Savvy traders will first place their stop-loss, then send in the limit order. This minimises slippage while getting into a trade. Besides, having an effective stop loss will also help cut the slippage during a trade.

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Know when to use stop losses

Each forex market has its own set of rules and trading patterns. To be successful in the long term, you must learn how to interpret these patterns. Trading with stop losses (also known as stop orders) is a good way to protect your investments from sudden drops in value. Guaranteed stops are not subject to slippage and will, therefore, always close your trade at the exact level you specify.

Never get caught out there without a certain stop loss. If you're trading the major currency pairs, like EUR/USD or EUR/GPB, we'd say they will be a little bit lower at risk of slippage. As said before, this is where all the professionals will tend to trade. Traders prefer liquid pairs because they know they can get in and out of them more easily.

A good rule of thumb is to take 10% off of your entry price to use as a stop-loss. If you see the price fall further than your stop-loss, it's time to cut your losses and get out. This will prevent you from immediately losing more money if the market continues to fall.

Here's where to set your stop loss - and why it's important>>

Select a good broker

The best forex brokers avoid slippage. However, slippage is a fact of life. There are a few factors that make some brokers more liable to give you slippage than others. Selecting one with a good reputation and high ratings is the best way to reduce your overpaying chances to gain access to the global market. To prevent pitfall, educate yourself on what to look for in a broker and learn how to avoid slippage in forex.

When you are looking for a broker, make sure you check out the spreads for your trade currency pairs. Spreads can vary a lot from broker to broker. For example, brokers with many small traders (rather than few big ones) usually have smaller spreads. Always check out your broker and get other traders' feedback when starting with an online forex broker.

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Keep an eye on low liquidity periods

When you place a trade, the market will react to your order but not as fast as you might want. This delay is a result of not enough buyers or sellers in the market. The system cannot go any further if these pairs are not available for trading at the price level specified by the trader. Thus, orders will take time to fill, resulting in the price being different from what you initially get.

There are many reasons for this, and much of it has to do with market liquidity and the market state at that time. Don't take it lightly since it could potentially eat up the profits you have made.

Being aware of major market events or news releases
Trade forex at a time which is most convenient for you. It's a 24/7 open market that offers trading opportunities around the world. Economic calendar events are announced every day, and they can cause price swings. So it would be best if you closed out your trades at the right moment to avoid losses or to lock in profits.

Keep an eye on the major market events, earnings announcements, and news releases. These can be highly volatile times. For instance, a day trader could be vulnerable to forex market slippage during these periods. If you must trade around important news events, then consider using stop market orders.

Don't know your slippage from your stop loss? See our easy forex dictionary of trading terms here>>

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Tags: Trading Tips

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