Slippage in forex refers to the difference between the expected price of a trade and the actual price at which the trade is executed. This can occur when market conditions are drastically changing in moments, leading to orders being filled at a price different from the requested price. Slippage in trading can happen in two ways, meaning it can have a positive or negative outcome. This difference depends on whether the price moves favorably or unfavorably for the trader. Slippage meaning is not always necessarily a bad thing, however, it is unexpected sometimes, which can be unpleasant to traders. This article is a comprehensive guide to help you understand slippage in forex, its causes, and impacts along with strategies on how to protect your trades from such incidents. Whether you are an experienced or novice trader, understanding the concept of slippage in trading and how it works will help you make informed decisions in your trading journey.
How Does Slippage Work?
Slippage in forex often happens when the market is highly volatile and the trader places an order at a certain price but due to that high volatility or liquidity issues, the order gets executed at a different price. Traders can’t determine when slippage happens or when it can affect their trades, however, slippage in trading is common during high-impact news releases, major economic events, or when trading during off-hours with lower liquidity. To understand it better we can go through an example: Imagine you place a buy order for EUR/SD at 1.10000. However, due to a sudden market change, the order you had placed, was executed at 1.10005. This means that instead of executing your order at that specified amount, you have experienced a negative slippage of 5 pips. The amount can differ depending on the market condition, 5 pips can turn to 50 pips which can displeasing.
How Common is Slippage in Forex?
Slippage in trading is a common occurrence in forex, especially during times of high volatility or when trading exotic pairs with lower liquidity. Traders should be more careful during major economic announcements like interest rate decisions or employment reports. Traders may also experience slippage when the market opens after the weekend, as liquidity providers adjust spreads during periods of market instability. To minimize slippage, traders be cautious and aware of these times, avoiding trading during high-impact news releases or volatile periods. Alternatively, using limit orders instead of market orders can help protect against significant slippage, as they allow traders to specify the exact price they’re willing to accept for a trade.
What Causes Slippage in Forex?
The question that most traders hang on to is what exactly causes slippage, Slippage is not a way for brokers or liquidity providers to try to charge you more rather it’s a difference between the price you place an order and the price it gets executed, simply caused by the market's high volatility, which can happen during important news and economic releases. In addition to that, liquidity shortages can cause slippage in trading, meaning that when there aren’t enough buyers or sellers at a given price level, your trade will be executed at the next available price. Traders should also be aware that execution speed delays can also be the main reason for the slippage they face, there can be a change in price before the trade is completed.
Market gaps are not slippage and they mainly occur when there’s a sudden jump in price, often seen after weekends or major economic releases.
Is Slippage Illegal?
Shortly no, slippage is a normal part of trading in such a fast-paced market. Brokers connecting their clients to the market will often face slippage, which is typical since traders are connected directly to the market. However, if a trader is not facing any slippages at all, chances are that they may be dealing with a B-Book broker. Additionally, unethical brokers may use slippage improperly to take advantage of their clients such as widening slippage through some price manipulation or completely preventing positive from happening. To avoid such practices traders should choose reputable brokers who have expertise in the financial market for years and have strict rules against price manipulation.
What Are the Profits and Losses from Slippage?
Since slippage happens after you place an order there are two different ways it can impact profit and losses. When a trade is executed at a better price than expected, leading to increased profits or reduced losses that’s a positive slippage, however, if is trade is executed at a worse price than expected, then it’s a negative slippage that leads to increased losses or reduced profits. For example, a trader places a buy order for USD/JPY at 130.500 with a stop-loss at 130.000 then because of sudden volatility, the price comes down to 129.800, causing the stop-loss to execute at a worse price. Instead of losing 500 points or 50 pips, the trader loses 700 points or 70 pips due to slippage.
When Was the Biggest Forex Slippage?
One of the most famous and significant forex slippage events occurred on January 15th, 2015, when the Swiss National Bank (SNB) unexpectedly removed its peg on the Swiss franc (CHF) against the euro. This decision was the reason for the drastic drop of the EUR/CHF pair down to over 30% within minutes. This led to extreme slippage traders faced, along with broker bankruptcies, and massive trader losses. Because of this event, many stop-loss orders failed to execute at their intended prices, causing catastrophic financial damage. However, for the people on the right side of this event, traders made massive profits. The amount of a typical slippage in the forex market is up to 60 pips and on a normal forex market day, this amount should not be exceeded.
How To Protect Your Capital From Slippage?
To minimize the risks of slippage in forex trading, traders could use different techniques such as using limit orders instead of market orders. Traders should utilize limit orders since they execute trades only at the specified price or better, preventing unexpected slippage.
Traders should cautiously select a reliable broker and avoid trading during high-impact news releases since these economic events can cause extreme volatility and large price gaps. Additionally, traders can choose trading in high-liquidity sessions, for example, the London and New York sessions generally have more liquidity, reducing the risk of slippage.
