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What is slippage?
In forex trading, the term forex slippage is a condition in trading that refers to the time when there is a difference between the price desired by the trader when placing an order, and the actual price at which the order is executed. For example, you place an order to buy the EUR/USD pair at 1.1171, but instead it is executed at 1.1175 (4 points higher).
Actually, slippage is quite frequent and can be experienced by traders at any forex broker. Slippage is usually used as an indication that a forex broker is cheating, but this is not always the case. This can also be caused by market conditions that are currently unbalanced. Slippage is actually not always detrimental to traders, because there are two types of forex slippage that can occur, namely positive slippage and negative slippage.
An example of negative slippage is when you buy a particular pair at 1.1171 but execute at 1.1175 (4 points higher), a buy order occurs above the desired price. While positive slippage is when a buy order is executed at the price of 1.1165 (10 points lower) and is profitable for the trader. Under normal conditions, slippage is actually not so annoying because it rarely occurs and even though there is a small price difference.
Slippage will feel very detrimental when the price changes very quickly due to news that has a big impact that causes turmoil. Trading slippage will not occur on a demo account and will only occur if you have traded on a real live trading account. Therefore, if you place a buy or sell order on a demo account, the order can be executed immediately without matching the price between the seller and the buyer.
Actually, slippage is quite frequent and can be experienced by traders at any forex broker. Slippage is usually used as an indication that a forex broker is cheating, but this is not always the case. This can also be caused by market conditions that are currently unbalanced. Slippage is actually not always detrimental to traders, because there are two types of forex slippage that can occur, namely positive slippage and negative slippage.
An example of negative slippage is when you buy a particular pair at 1.1171 but execute at 1.1175 (4 points higher), a buy order occurs above the desired price. While positive slippage is when a buy order is executed at the price of 1.1165 (10 points lower) and is profitable for the trader. Under normal conditions, slippage is actually not so annoying because it rarely occurs and even though there is a small price difference.
Slippage will feel very detrimental when the price changes very quickly due to news that has a big impact that causes turmoil. Trading slippage will not occur on a demo account and will only occur if you have traded on a real live trading account. Therefore, if you place a buy or sell order on a demo account, the order can be executed immediately without matching the price between the seller and the buyer.
What causes forex slippage?
Forex slippage usually occurs when market conditions are unbalanced, i.e. when the amount of trading volume and price demand between buyers and sellers are far apart. In simple terms, an order can be filled if there are sellers and buyers who order at the same price and lot size. When we place an order but there is no other order that is exactly suitable to fill it, then the price will be executed at the next best price.
So, for every buyer with a certain price and transaction size, there must be the same number of sellers with the same price and transaction size. If there is an imbalance between buyers or sellers, this is what causes the price to move up or down.
For example, if you as a trader opens a buy position at 1.3650 on the EUR/USD pair, but there are not enough people or no one willing to sell their Euro at 1.3650 USD, your order is still waiting for the next best price available and buys the Euro at a higher price and negative slippage occurs. However, if too many people want to sell Euros at the time the position order is placed, you may find a seller willing to sell it at a lower price and there will be positive slippage.
So, for every buyer with a certain price and transaction size, there must be the same number of sellers with the same price and transaction size. If there is an imbalance between buyers or sellers, this is what causes the price to move up or down.
For example, if you as a trader opens a buy position at 1.3650 on the EUR/USD pair, but there are not enough people or no one willing to sell their Euro at 1.3650 USD, your order is still waiting for the next best price available and buys the Euro at a higher price and negative slippage occurs. However, if too many people want to sell Euros at the time the position order is placed, you may find a seller willing to sell it at a lower price and there will be positive slippage.
How to avoid slippage?
1. Avoid trading at the time of high-impact news releases
Forex slippage is very likely to occur when the price moves too quickly due to the number of orders at almost the same time. This kind of condition occurs when there are fundamental news releases that have a high impact on trading such as central bank announcements, NFP (Non-farm Payroll) and other important news and issues. Avoiding slippage is actually very easy, just pay attention to the economic calendar to get the release schedule of announcements and fundamental news that needs to be avoided. This is especially effective if you are not a trader who relies on news trading strategies. As for those of you who rely on news trading strategies, there are three more ways below that are suitable to avoid slippage.
2. Use limit orders
Forex slippage usually occurs during pending stop orders, so to avoid slippage, traders can activate a buy position at a lower price than the current one (buy limit). As for sell positions, limit orders are useful for executing orders at a price higher than the current level (sell limit). Because it is in the opposite direction to buy or sell itself, limit orders can be said to be a counterweight to what happens in the market. When the ordered price is not available, the order will not be forced to enter so as to avoid forex slippage.
Instead, the pending order status will return to waiting mode. Technically, limit orders work best for traders who anticipate a price bounce at a certain level. On the other hand, limit orders cannot replace the buy stop and sell stop functions as a complement to the breakout strategy. What is a breakout strategy? A breakout is a condition when the price breaks out of the price range in which an asset has been trading for some time.
Instead, the pending order status will return to waiting mode. Technically, limit orders work best for traders who anticipate a price bounce at a certain level. On the other hand, limit orders cannot replace the buy stop and sell stop functions as a complement to the breakout strategy. What is a breakout strategy? A breakout is a condition when the price breaks out of the price range in which an asset has been trading for some time.
Breakouts can also be used to refer to situations when a certain price level is breached, be it a support level, resistance, pivot points, fibonacci, or something else. So if you use the breakout technique, it's a good idea to place orders manually.
3. Market order deviation range
Brokers will usually provide a feature to allow the trader's request price to be executed with a slippage 'tolerance' as desired by the trader. If your trading platform has a maximum deviation feature, then use this feature to avoid slippage.
Maximum deviation is the maximum deviation limit that traders can determine for themselves. This means that you can set the maximum price deviation limit that applies to each trading position.
For example, if you fill a maximum deviation of 3 pips, then the price will still be executed as long as the slippage is only 3 pips or less. Outside of the deviation limit, the ask price will not be executed. You can set the maximum deviation in the order window.
4. Choose a forex broker that puts technology first
For those of you who use a news trading strategy and can't give up the benefits of stop orders, then the last solution is to choose a forex broker. The key is to choose a broker that is able to provide a high level of trading technology sophistication. For example, forex brokers with ECN (electronic communication network) technology. ECN is an electronic system designed to bridge forex traders to jump directly into the liquidity market. This means that the broker 'throws' all customer orders into the market and this is more guaranteed that forex slippage occurs at a minimum.
In addition, there are several forex brokers that offer free tools to minimize slippage, namely with the guaranteed stop loss feature. This facility works specifically to ensure that the stop loss is always executed at the ordered level. Given how important the stop loss function is as a safeguard for accounts from large losses, the role of guaranteed stop losses certainly cannot be ruled out.
Unfortunately, guaranteed stop losses are still a 'luxury' feature that only a handful of forex brokers offer. So as a trader, you no longer need to be confused or even panic when there is forex slippage with a price that is suddenly executed far from the ask price. Make sure you don't trade during times of high volatility. However, that doesn't mean you shouldn't trade when the market is experiencing high volatility. It's just that high volatility also carries greater risks. The most important thing is to always make a trading plan and money management to minimize risks. Happy trading!
In addition, there are several forex brokers that offer free tools to minimize slippage, namely with the guaranteed stop loss feature. This facility works specifically to ensure that the stop loss is always executed at the ordered level. Given how important the stop loss function is as a safeguard for accounts from large losses, the role of guaranteed stop losses certainly cannot be ruled out.
Unfortunately, guaranteed stop losses are still a 'luxury' feature that only a handful of forex brokers offer. So as a trader, you no longer need to be confused or even panic when there is forex slippage with a price that is suddenly executed far from the ask price. Make sure you don't trade during times of high volatility. However, that doesn't mean you shouldn't trade when the market is experiencing high volatility. It's just that high volatility also carries greater risks. The most important thing is to always make a trading plan and money management to minimize risks. Happy trading!
