What is Forex slippage?
A slippage is an eventual difference between the real price of a tool and the price at which an order will be executed. The difference is explained by the fact that the execution of a trade requires 2 parties: a seller and a buyer. The currency market is not an exception. It means, when you open a trade, there must be the respective party. If not, the trade will be executed at the first price available, which can naturally differ from the initial one. Unfortunately, this error is inevitable.
When can a slippage occur?
If you have opened a trade at a market price
If you have closed a trade at a market price
If you have used a pending order to open a trade
If you have used a pending order to close a trade
What is the volume of slippage dependant on?
This question should concern those traders who practise pipsing or scalping. Spreads, swaps, brokers' commission, slippages can drop their profit to zero. When making short-term trades aimed at a profit of just a few points, slippages may ruin estimated profits completely. So, what does the volume of slippage depend on? There are several factors: market volatility, a trader's account type, order processing type.
Factor №1: Market volatility
In other words, the notion of market volatility includes the instability of quotes and the rate of their fluctuations. Several factors affect market volatility: the general economic state of a particular sector, the activity of market participants in regard to a particular tool, and macroeconomic statistics.
Factor №2: Trader's account type
Account types are characterized by a variety of criteria, an order execution speed being one of them. For example, Standard or Classic accounts are available to most traders because of moderate deposits and leverage, but the order execution speed in those accounts is quite average. On the contrary, ECN and STP accounts can boast the high speed and accuracy of orders execution.
Factor №3: Order processing type
There are two types of orders execution: Instant Execution and Market Execution. With Instant Execution, a trade is opened exclusively at the price indicated in a trader's order, which excludes naturally any slippages. If a trader's price is inadmissible, a requote occurs and a trader can either indicate another price or cancel a trade. With Market Execution, a trade is not necessarily opened at the price specified in a trader's initial order.
Now that you know what Forex slippage is and what it's related to, you can check out if your trading strategy is sensitive to slippages to reduce eventual risks. If you are a scalper, examine your trading conditions at length and apply this information in practice. That's all for now.
See you later, friends!
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.