Definition of slippage and its significance for traders
At the moment, many novice traders are interested in finding optimal algorithms for Forex trading, however, making deals on profitable conditions is not always possible due to such a trading phenomenon as slippage. What is slippage’s meaning? It is implied that the transaction does not meet the trader’s financial expectations. In fact, the order is usually executed at a price different from the one at which the trader wanted to close the deal initially.
In our today’s review, you will get acquainted in detail with the concept of slippage when trading currency in Forex. Understanding how this happens and what causes slippage will help you to correctly plan your Forex trading strategy in order to control slippage and even minimize it. Of course, most traders would like to get rid of this annoying and upsetting phenomenon altogether, but how real it is, you will also learn from our article.
So, more specifically, the essence of slippage in Forex lies in the price difference in relation to what indicators were given to the trader at the closing of the deal and what value was expected when the order was sent. The concept of slippage can be considered in two main aspects: from the point of view of loss-making for a trader and from a psychological position. Slippage not only reduces the ability of a currency to buy and sell, that is, liquidity, but also has a demotivating effect on a person.
Naturally, the existence of this phenomenon is perceived by traders as a problem, so many try to solve it by setting up various settings in the software in order to neutralize this negative moment when trading in Forex. A considerable number of users also believe that with the right choice of a broker, it is possible either to absolutely avoid slippage in Forex, or to achieve a tangible decrease in it.
Objective assessment of slippage in Forex
Strictly speaking, slippage is considered an inevitable phenomenon that is inherent in any market, be it trading in the securities market or in the Forex currency platform. Experts agree that slippage can not be attributed to either completely negative or positive trends, since the difference between the expected and actual prices is in any case considered as slippage. Should the average trader be wary of this?
Due to the fact that slippage is a natural process, any trader should be emotionally prepared for this development of events. Newbies are often told about the impossibility of a complete “escape” from slippage in Forex. This should be taken calmly, without unnecessary drama, because slippage is just a cost to your business. This phenomenon is minimized by trading with limit orders and high volume currency pairs.
It should be understood that slippage in Forex is traced during periods of maximum volatility when using market orders. Let’s say that the execution of a volume market order requires a large volume, respectively, but the price chosen by the trader lacks volume, so it is not possible to maintain the spread relative to the buy and sell. It is important for a beginner investor to understand that the spread is understood as the difference in the buy (Ask) and sell (Bid) prices.
Due to the greater tendency to slippage in Forex, market orders obviously carry such a risk. Experienced traders recommend resorting to using limit orders for a win-win exit from profitable trades. If you need to quickly enter a position and quickly exit, then it would be more expedient to use a market order. In this scenario, you need to come to terms with the inevitable slippage that accompanies instant trading in Forex.
Trades made with limit orders imply avoidance of slippage in Forex, but in this case there is a possibility that the trade will not receive execution, especially if the price does not return to the limit value. In situations where market changes are observed as more dynamic, the risk of a trade default on a limit order increases. And this, in turn, severely limits the time period that is needed to close an order at the expected price.
Slippage when using market orders
Thus, based on the information presented above, can it be argued that trading in Forex with a broker without slippage is a reality? As we highlighted earlier, only trading with market orders can lead to slippage. In this regard, we suggest that you familiarize yourself with the main types of market orders, which carry the probability that a trader can agree to the seller’s price. Among them are the following:
- the trader is ready to buy and sell at the highest price coming from the seller of the currency – this is Market Buy;
- the trader agrees to sell at the highest price offered by buyers – this is Market sell;
- Market Buy is postponed in time and is set at a higher price than the current one – this is Buy stop;
- Market Sell is also postponed for some time, because it is placed below the current price at the moment – this is a Sell stop;
- Market Buy and Market Sell, pending and closing the current open position, are Stop loss.
The orders we have listed can lead to slippage in Forex, as they have one common feature. All of them are individually designed to execute the order at the optimal, best possible price. This refers to the prices that are available for order execution right now. Nevertheless, this concept is rather arbitrary, because your expectations about the best price may differ from the realities of currency trading in the Forex market.
What factors influence the amount of slippage in Forex?
Many traders try to anticipate the potential size of slippage in order to minimize risks and avoid too significant losses. This topic is especially interesting for those who adhere to such a Forex trading strategy as scalping. Short-term trading usually does not bring large profits, so slippage can cancel out even an insignificant profit when using the stop loss algorithm. To know the probable causes of slippage, pay attention to:
- liquidity of trade;
- volatility of the market itself;
- the method the broker chooses to work with the order;
- type of account set up by the trader.
These parameters can have an impact on the amount of slippage in Forex, and a trader should consider the presence of such factors before directly starting to trade. For example, market volatility determines the magnitude of price fluctuations. Currency liquidity, as well as the activity of the parties in the aggregate, affect the volatility. The amount of slippage in Forex will also be directly related to the volatility and liquidity of the market.
Before starting Forex trading, any trader has a choice between different types of accounts. The main difference here lies in the speed of the transaction. As a rule, basic packages for creating an account do not differ in special requirements for the amount of the deposit and the leverage. The speed, accordingly, on such accounts will not be the highest, so even the type of trading account affects the amount of slippage in Forex.
The amount of slippage in Forex also depends on the broker, namely on how it processes the order. The most common are two processing algorithms, which include “Instant execution” and “Market execution”. How do they differ and can you feel this difference in practice? Instant execution assumes that the real market does not see traders’ orders. In slang, this space is called a “kitchen”, and the party interested in causing you losses, a “kitchen broker”.
As far as market execution is concerned, in this situation, the amount of slippage in Forex may be less due to the reality of the market in which you are trading. Thus, the position is opened based on the real market picture. Of course, requotes can occur here, when a trader has to revise the price from their order at the request of the broker. This circumstance can affect the amount of slippage in Forex, for which you need to be prepared internally.
How to develop an adequate attitude to slippage in Forex?
In our overview, we introduced you to the basic concepts related to the topic of slippage. As it was established by analysts, this phenomenon accompanies trading in all markets, although sometimes in this context attention is focused on markets with inactive, sluggish trading. Forex, of course, is not one of them, since the daily activities of any trader can resemble a real roller coaster with dynamic ups and downs.
Many processes in the field of foreign exchange trading in Forex should be carried out with maximum muffling of emotions on the part of the trader. The situation with slippage is no exception, in which it is also necessary to leave all feelings and experiences outside of your professional activity on the currency exchange. Psychological readiness and inner acceptance of the very likelihood of an unfavorable outcome is the best preventive measure against possible disappointments.
In addition, such behavior trains the will of the trader, strengthens their nervous system and leaves room for making informed and well-considered decisions regarding transactions in Forex. In any type of business, there is always room for risk and failure, and even the most successful entrepreneurs who have managed to build real business empires from scratch have experienced financial losses many times. Perhaps we have a lot to learn from them. At the very least, you can take a note of the philosophical attitude towards such a phenomenon as slippage, and confidently continue trading in Forex.