What is slippage in Forex Trading? How can it be avoided?
Slippage is referred to as the difference between the expected price at which the trade is placed and the actual price at which it is executed. This generally happens when the market moves up and down abruptly. It may be because of the high volatility caused by a big economic event or when there’s low liquidy and not enough trading volume to match your order at the chosen price.
Slippage can move in either direction. If it moves in your favour and the order is filled at a better price than the level you set it at, it is called positive slippage. If it moves against you and an order is executed at the worst price resulting in a small profit or a big loss, it’s called negative slippage.
What causes slippage?
As mentioned above, slippage occurs when the market is either highly volatile or has low liquidity. The concept behind low liquidity is that, liquidity accounts for the number of market participants and when the liquidity is low, there are less participants which means more time for placing and executing it after finding a suitable buyer or seller. In a highly volatile market even a difference of a few seconds in filling the order can contribute to changing the price.
How to minimise slippage:
1. Avoid News trading: Slippage is more likely to occur during or prevailing news events. Any official announcements from banks about interest rates or monetary policies of a country can heighten the volatility of the market which can lead to slippage. Avoiding trading in such conditions is helpful in minimising the negative impact of slippage.
2. Use Limit orders: The advantage of using a limit order instead of a market order is that your order will not be filled at the worst price. It may either fill your order at the price you want or at a better price and won’t be executed until the price reaches the level you have set.
3. Avoid thinly traded pairs: Since liquidity directly affects slippage, the best way to minimise slippage is to trade pairs that have high trading volume and are highly liquid. This is one reason that major pairs are preferred by traders as they are less likely to show wild movements and are more stable.
Some of the popular brokers offering ECN accounts are:
4. Avoid keeping positions open on the weekend: There is a high possibility that a big news or announcement can break after the market closes on Friday. It may result in a huge price gap and traders may experience slippage when the market reopens.
To conclude, it’s common to experience slippage in the market where fluctuations occur more quickly leading to the order not being executed at the price you want . However, it can be reduced by taking the right measures.
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