It is a typical occurrence in forex trading, although it is often misinterpreted. Knowing how it happens in the forex market may help traders reduce negative slippage while possibly enhancing the positive one. These ideas will be discussed in this article to offer some insight into the mechanics of slippage in forex and how traders might lessen its negative consequences.
WHAT IS IT?
When a trade order is completed at a price that differs from the intended price, slippage takes place. This often happens when volatility is intense, and orders can’t be filled at the prices the customer wants.
Slippage in the forex market is sometimes seen negatively, yet it may be advantageous for traders. Whether the fill price is higher or lower than the price asked, when forex trading orders are sent out to be filled by a liquidity provider or bank, they are filled at the best available price.
Let’s use the example of buying the EUR/USD at the current market rate of 1.3650 to illustrate this idea using numbers. When the order is filled, there are three possible outcomes: no slippage, positive slippage, or the negative one. Below, they are discussed in further detail:
#1 OUTCOME (NO SLIPPAGE)
The order was placed, and once the best purchase price of 1.3650—precisely what we asked for—was provided, the order was completed at that price.
#2 OUTCOME (POSITIVE SLIPPAGE)
After the order was placed, the best purchase price suddenly changed to 1.3640 (10 pip below the price we wanted), and the order was then completed at this new, better price of 1.3640.
#3 OUTCOME (NEGATIVE SLIPPAGE)
When the order was placed, the best buy price abruptly changed to 1.3660 (10 pip above the price we wanted), and the order was then completed at this price.
It occurs if we are filled at a price different from the price specified on the deal ticket.
WHAT LEADS TO SLIPPAGE AND HOW DO YOU PREVENT IT?
It all comes down to the fundamentals of buyers and sellers in a real market. There must be an equal number of vendors with the same price and trade size for every buyer with a specific price and trade size. Prices change up or down if there is ever an imbalance between buyers and sellers.
Forex traders will thus need to search at the next best available price(s) and purchase the 100k EUR/USD at a higher price, resulting in negative slippage if there are not enough (or no one at all) prepared to sell their Euros for 1.3650 USD.
We could locate a seller prepared to sell our Euros at a price lower than what we had initially asked if there was a rush of persons looking to sell their Euros when our order was filed, providing us with positive slippage.
It may also happen when standard stop losses are not respected, meaning the stop loss threshold is not met. There are “guaranteed stop losses,” which are distinct from standard stop losses. No matter what happens in the underlying market, guaranteed stop losses will be respected at the designated level and filled by the broker. In essence, the broker will assume responsibility for any losses that would have arisen through slippage. Given this, guaranteed stops often incur a premium fee if they are used.
WHICH CURRENCY PAIRS ARE LESS LIKELY TO SLIPPAGE?
The more liquid currency pairings, such as the EUR/USD and USD/JPY, will be less prone to slippage under typical market circumstances. However, even these liquid currency pairings may be vulnerable to it when markets are erratic, such as before and during a critical data release. Volatility may dramatically rise in response to news and data events.