Slippage is the difference between the expected price and the price at which the order was actually executed. It is the similar if you pay more than it was indicated on the price tag.
To understand the slippage is easier using the example:
There is an uptrend in the market at the moment. You open a long position at a price of 1.1764. An order successfully opens. But… It opens at a price of 1.1767. The difference between requested price and filled one is 3 points. These 3 points are called slippage.
The value of slippage depends on the price leap that has occurred. It can vary from one to several dozen points.
Slippage can be either positive or negative depending on the trend direction and the order being opened. If the order is opened at a better price than requested, it is positive slippage and vice versa. Negative slippage is an additional loss, while positive one is an additional profit.
Why do slippages occur: the main reasons
Slippage is considered to be a feature of the interbank system, that means the transactions are being withdrawn to the interbank market.
When slippage occurs, you can lose some of the possible profits, it is usually a few points. They are important for those who use short-term trading. For those who trade on high timeframes, slippage of several points is of no importance.
The main reasons for slippage are:
- High volatility. The price changes so quickly and a new order can’t be opened at the Bid price. It takes place especially during the important news releases, such as an interest rate decision or the FOMC minutes. Slippage is much higher in volatile markets. It is important to be informed of any scheduled high-impact news events which are likely to cause high volatility.
- Technical problems. It includes network delays between your trading terminal and the server, between broker and liquidity providers, as well as the slow Internet connection.
- By the fault of the broker. Dishonest brokers can deliberately slow down the order execution, whereby orders are opened at the unprofitable for trader price.
Except for slippage, there are also requotes in the Forex market. But these concepts differ, don`t confuse them. A requote means that there is no price in the market at which the trader sends a request.
For example, you decide to open an order, and click “Buy”. In response, a message appears that there is no price and the broker offers a new price. It is the requote.
At slippage, the order is executed, but at a different price.
How to overcome slippage on Forex?
There are, however, some ways to reduce slippages.
Method # 1: Correction of orders in the MetaTrader 4 terminal
When opening an order, the trader can set the possible maximum deviation from the quoted price.
The price deviation is used in the Instant execution mode.
It will help you to confirm new prices automatically. If the deviation is greater, an order won’t be executed, and the trader will receive a message about the requote. If the difference between the new price and the requested one is below or equal to the indicated deviation parameter, the order will be executed at a new price automatically.
Method #2: Pending orders
As you know, there are several types of pending orders: stop and limit. Using of limit pending orders in most cases allow avoiding slippages, orders will be closed and opened precisely at the prices that were specified by the trader.
Stop orders don`t protect against the slippage. They can also slip.
Method #3: Don`t trade on news
The problem with liquidity arises, as a rule, when the news is released. The market during news releases is very volatile and often becomes unpredictable, only the experienced traders should trade in it. Therefore, it is recommended not to trade about a half an hour before the news release and half an hour after the release.
Method #4: Trade with a trusted broker
As I have already said, slippage is often the result of unfair actions of brokers. Therefore, be careful and attentive while choosing a broker, check reputation, trading conditions. Here you can find 6 tips how to choose a good broker.
To sum up, slippage occurs mainly in highly volatile markets during economic and news releases. It is impossible to eliminate the possibility of slippage completely. But you can significantly reduce your possible losses.