What is forex slippage?
In the context of forex trading, slippage refers to the difference between the expected price of a forex trade and the actual price at which the trade is executed.
Slippage can occur when there is a delay in the execution of a trade, or when the market moves quickly and there is a sudden change in price between the time the trade is ordered and the time it is executed.
Slippage can be positive or negative. Positive slippage occurs when the actual price at which a trade is executed is better than the expected price, resulting in a better profit for the trader. Negative slippage occurs when the actual price is worse than the expected price, resulting in a greater loss for the trader.
Slippage is more likely to occur during periods of high volatility or low liquidity, when there are fewer buyers and sellers in the market. It can also occur when a trader is using a market order, which is an order to buy or sell at the best available price in the market at the time the order is executed.
To reduce the risk of slippage, traders can use limit orders, which are orders to buy or sell at a specific price or better. It is also important for traders to choose a reputable forex broker with fast and reliable execution speeds to minimize the risk of slippage.
Example of Slippage
Here is an example of slippage in forex, presented in bullet points:
- A trader wants to buy 10,000 units of EUR/USD at a price of 1.2000.
- Due to sudden market volatility, the price of EUR/USD jumps to 1.2010 before the trader’s order can be executed.
- The trader’s order is filled at the next available price, which is 1.2010.
- The trader experiences negative slippage, as they end up buying at a price that is 10 pips higher than their intended price.
- This increases the cost of their trade and reduces their potential profits.
Alternatively
- A trader wants to buy 10,000 units of EUR/USD at a price of 1.2000.
- Due to sudden market volatility, the price of EUR/USD drops to 1.1990 before the trader’s order can be executed.
- The trader’s order is filled at the next available price, which is 1.1990.
- The trader experiences positive slippage, as they end up buying at a price that is 10 pips lower than their intended price.
- This decreases the cost of their trade and increases their potential profits.
Positive Slippage
Positive slippage in forex trading occurs when a trader’s order is executed at a better price than the expected price. This can happen when market conditions are favorable, or when the broker is able to find a better price for the trader’s order through improved liquidity or faster execution speeds.
For example, let’s say a trader wants to buy EUR/USD at 1.2000 and places a market order. However, by the time the order is executed, the price has moved to 1.1995. If the order is executed at 1.1995, the trader would experience positive slippage because they were able to buy EUR/USD at a better price than they expected.
Positive slippage can result in greater profits for the trader. However, it is important to note that positive slippage is not guaranteed and can be unpredictable. Traders should always be aware of the potential for slippage when trading forex, and should choose a reputable broker with reliable execution speeds to minimize the risk of slippage.
Negative Slippage
Negative slippage in forex refers to the situation where a trader’s order is executed at a worse price than the one they intended or expected. This can occur when market conditions change quickly or there is low liquidity in the market, and the trader’s broker is unable to execute the order at the specified price. Negative slippage can result in larger losses than expected for the trader, as they may end up buying at a higher price or selling at a lower price than they intended. It is important for traders to be aware of the potential for slippage when trading forex, and to take steps to minimize the risk of negative slippage, such as choosing a reputable broker with fast and reliable execution speeds, using limit orders to specify the maximum price they are willing to pay or the minimum price they are willing to sell at, and avoiding trading during periods of high volatility or low liquidity.
Causes of Slippage
There are several potential causes of slippage in forex trading, including:
- Market volatility: When the forex market experiences high volatility, prices can move quickly and unexpectedly, causing slippage between the time the order is placed and the time it is executed.
- Low liquidity: When there are fewer buyers and sellers in the market, there may not be enough orders to fill a trader’s order at the expected price, resulting in slippage.
- Broker execution speeds: The speed and reliability of a trader’s broker can also impact the likelihood of slippage. If the broker’s execution speed is slow or unreliable, there is a greater chance that slippage may occur.
- Order size: Larger orders may be more difficult to fill at the expected price, especially in markets with lower liquidity.
- News events: Major news events, such as economic releases or political developments, can cause sudden changes in market conditions and increase the likelihood of slippage.
- Trading during off-hours: Trading during off-hours or on weekends can also increase the risk of slippage, as there may be fewer buyers and sellers in the market.
Why does Slippage Matter?
Slippage matters in forex trading because it can impact a trader’s profitability and the overall outcome of their trades. Slippage can result in trades being executed at a different price than the one intended by the trader, which can lead to either positive or negative outcomes.
If a trader experiences positive slippage, they may be able to buy or sell a currency pair at a better price than they expected, resulting in a higher profit than they anticipated. On the other hand, if a trader experiences negative slippage, they may end up buying or selling at a worse price than they expected, resulting in a larger loss than they anticipated,
Additionally, if slippage occurs frequently, it can impact the overall performance of a trader’s trading strategy, leading to suboptimal trading results. This can be particularly problematic for traders who use high-frequency trading strategies or scalping strategies, which rely on fast execution and minimal slippage to be successful.
Therefore, it is important for traders to be aware of the potential for slippage when trading forex, and to take steps to minimize the risk of slippage, such as choosing a reputable broker with fast and reliable execution speeds, using limit orders to specify the maximum price they are willing to pay or the minimum price they are willing to sell at, and avoiding trading during periods of high volatility or low liquidity.
Final Thoughts
Forex slippage is an important concept for forex traders to understand, as it can impact their trading results and profitability. Slippage occurs when the price at which a trader’s order is executed differs from the price they intended or expected, and can be either positive or negative.
While positive slippage can result in higher profits for traders, negative slippage can lead to larger losses and can impact the performance of a trader’s trading strategy. Therefore, it is important for traders to take steps to minimize the risk of slippage, such as choosing a reputable broker with fast and reliable execution speeds, using limit orders to specify the maximum price they are willing to pay or the minimum price they are willing to sell at, and avoiding trading during periods of high volatility or low liquidity.
Ultimately, understanding slippage and how to minimize its impact can help traders to improve their trading results and achieve greater success in the forex market.
If you are looking for a forex broker with deep liquidity and minimal slippage, IC Markets would be my top choice. They are an ECN broker with tight spreads, low fees and quick execution speeds at the best possible prices on the FX market.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
