Slippage is the difference between the foreseen price of a trade and the exact price at which the transaction or trade was executed. Slippage sometimes occur during times of higher volatility when the market orders are used and also when many orders are done or when there is not enough interest at a demand price level to maintain the desired price of the trade.
Slippage is not directly referred to as negative or positive but as a change between the desired and the exact prices. When orders are made, the constant securities are bought or sold out at the favorable price available. This can make an order bring forth results that are favorable, less favorable or exactly equal to the initial expectations with the outcome being referred to as a positive slippage, negative slippage and a no slippage respectively. Since the market prices can quickly change, slippage happens during the delay between an ordered trade and when it finally gets executed. Slippage is used both in forex trading and stock trading with the meaning being the same in both cases.
UNDERSTANDING FOREX SLIPPAGE
A forex slippage happens when an order is completed, often without limit order or a stop loss which happens at a less accepted rate than it was originally set. Forex slippage is more likely to happen when volatility is high, maybe due to news events leading to an order being difficult or impossible to execute at the wanted price. In this kind of scenario, most forex traders complete the trade at the most available price except the presence of a limit order stops the trade at a present price point.
Even though a limit order can stop or prevent a negative slippage, it comes with an inherent risk of the trade not being executed fully if the price happens not to return to a favorable one. The risk rises in situations where market instability occurs more quickly and significantly limits the amount of time stipulated for a transaction to be completed at an acceptable price.
HOW TO COUNTER THE EFFECTS OF FOREX SLIPPAGE
Since slippage in the forex market is inevitable, rather than dwelling on the causes, it will be best to position the mind on ways to counter the effect of slippage just in case of a rainy day. Here below are some steps which might help;
1. Attempt to manually close a trade without relying on stops when there is a systemic shock to the market and you are in a losing position.
2. Always make use of sound forex risk management techniques to reduce losses to the barest minimum when exposed to it.
3. Use brokers who offer an electronic communication network platform for speed purposes in filling orders.
4. Always make sure to check that your trades or transactions are hedged.
5. Due to fraudulent practices on the parts of brokers who want to take advantage of slippage situations, take snapshots of your account balance in case of any foul play later on.
6. Never trade high impact news on the spike. Since slippage occurs at this time, allow the period to pass before trading. That way you will not be affected by slippage if it occurred.
Slippage is inevitable in the forex market, though these measures stated above cannot prevent it from happening but one thing is for sure, it can minimize the level of damage a trader will be exposed to.
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.