What is Slippage in the Forex market?admin 22 January 2022
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Slippage is defined as any difference between the actual price paid and the intended price. The amount of slippage can range from zero to positive or negative depending on the order type, whether it is a buy or sell, and whether the order is to open or close a position.
Large market orders may result in slippage when volume at the selected price for maintaining a bid/ask spread is insufficient, but this is not always the case. It also happens in markets that move quickly and are highly volatile, making them vulnerable to sudden and unexpected changes in a particular trend.
When should you expect slippage in the market?
When important news events occur, slippage is common. Slippage is more likely to occur if banks make announcements on interest rates and monetary policy or if a company releases earnings reports or changes its top executives.
When corporations make announcements about their new CEO, it is not always possible to predict what will happen next. However, it is not always clear what announcements to expect during these meetings. For instance, we can point to the US Federal Reserve decisions that usually lead to slippage.
Slippage in the forex market
Slippage in forex trading is most prevalent when market volatility is high, and liquidity is low. However, this is more common on less popular currency pairings since popular ones like EUR/GBP, GBP/USD, and USD/JPY often have significant liquidity and minimal volatility.
As an example, let’s assume you decide to take a long position on the AUD/USD currency pair after it was quoted at $0.7. However, the price may have risen to $0.8 between the time the order was submitted, and the transaction was completed. In this case, you would have suffered a large slippage since you would have purchased at a greater level than you intended.
How to Avoid Slippage in Trading
Slippage can have a negative impact on your trading, but there are a number of techniques to minimize it.
Also Read: What does Hedging Mean in Trading?
Trade in markets where liquidity is high, and volatility is low
Trading in low-volatility, high-liquidity markets help reduce slippage. Because low volatility means the price is less likely to fluctuate fast, and high liquidity implies many active market players accommodate the opposite side of your trades, both of which are beneficial. You may also reduce your risk of slippage by trading just during peak hours when liquidity is at its peak.
As a result, your transaction is more likely to complete quickly and for the price you desire. For example, when major US exchanges like the NASDAQ and the New York Stock Exchange are open, most trading takes place. Similarly, although Forex is a 24-hour market, the majority of deals occur while the London Stock Exchange is open. Overnight or on weekends when markets are not open, slippage is more likely to occur. Because news or announcements that occurred while the markets were not operational may affect price adjustments when they reopen.
Use guaranteed stops and limit orders
Unlike other forms of stops, guaranteed stops are not susceptible to slippage and will always close your trade at the exact level you select. As a result, they’re the most effective strategy to mitigate the risk of a market moving against you.
It’s worth noting that guaranteed stops, unlike ordinary stops, come with a cost if they’re activated. On the other hand, limits can help reduce the chance of slippage while you’re starting a trade or want to take profit in a trade that seems to be successful.
Choose a broker that has your back!
Some brokers do not care enough about their users. For example, If the price moves against them when opening or closing a position, they will still execute the order. This is not fair at all, but it is the traders’ fault! The traders who do not research about the different brokers before entering the market suffer this issue the most. You should always read the brokers’ services to find the best option.
You are now familiar with the concept of slippage. In addition, you know the reasons why it occurs and the actions you may take to avoid it. However, if you take the proper precautions, you will not require them at all. Choosing the appropriate broker will assist you in managing such risks, and you will not have to be concerned about anything at all.
DeltaFX broker has always tried to provide its customers with the best possible service. The “no-slippage” service is merely one of the services available. It is possible to begin trading in DeltaFX without being concerned about slippage. All of your positions will open and close at the price you have chosen in your trading plan. We guarantee it! Open an account in DeltaFX and begin your trading activities with many attractive services today.