What Is Slippage? Why Should You Watch Out For Slippage In Forex?

What Is Slippage? Why Should You Watch Out For Slippage In Forex?

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One of the issues that annoys traders the most when trading forex, especially during peak time frames, is the problem of slippage, also known as slippage . Slippage occurs when the price you observe on the trading board is different from the price when the order was executed, and this is due to many reasons related to the market and the nature of the broker.

In this article, lotforex will analyze in depth the problem of slippage in Forex, find out what slippage is, the root cause of slippage and how traders can reduce its impact when doing so. trading strategies .

What is slippage? What is Slippage?

What Is Slippage? Slippage is a phenomenon that occurs when there is a difference between the price when you place an order and the price that is actually executed.

What is slippage?
What is slippage?

How much is 5 pips of USD/JPY worth? This depends on your trading volume, for example if you trade mini lots (0.1 Standard Lot), then 5 pips USD/JPY is worth about 4.66 USD. However, if you trade standard lots, then the value of 5 pips USD/JPY comes to 46.6 USD, or more than 1 million VND.

In short, in a slippage trade, it is likely that you will not be able to control your profits, transaction costs, and it is more difficult to place stop loss or take profit orders. Although in theory, you can still see positive slippage (meaning you will receive more money due to slippage to your account) but in practice there is almost no, this problem I will talk about details in the following section.

Almost no trader wants to experience slippage and always tries to find a way to avoid this phenomenon. To overcome slippage, let’s first see what the root cause of slippage is!

What causes price slippage?

Slippage can happen because trading conditions in the market change too fast, affecting supply and demand psychology, or it can also be due to the exchange’s delay in order matching, even due to real fraudulent forex brokers. currently manipulated.

What causes price slippage?
What causes price slippage?

Market volatility in the sessions after the news

As you may know, the foreign exchange market is affected by macroeconomic and geopolitical factors, so if a news release is released to the public, it has a direct impact on a certain type of currency. currency, can also lead to slippage.

Take for example USD-denominated currency pairs (EUR/USD, GBP/USD,…), news like interest rate adjustments from the US central bank, the release of new non-farm payrolls (non-farm payrolls). farm payroll)… can make the market react strongly. As a result, investors will change their trading strategy, causing large and unexpected fluctuations, causing the order price to change unpredictably.

Reasons for changes in supply and demand

The difference between the bid and ask volume can lead to slippage, which can also be the result of important market news, when the price moves too quickly, and the broker cannot execute orders. keep up with the market speed.

Broker’s order matching technology

This problem belongs to the nature of the broker because the exchanges can use different technologies when matching orders, and the execution speed of these technologies is also quite different: from 1-2 seconds, it is only 0.1 second.

Fraud and manipulation brokers

There are many fraudulent Forex brokers in the form of manipulating buy and sell orders, adjusting slippage, making traders on the floor always lose and burn their accounts. Some fraudulent Forex exchanges in Vietnam have just been dismantled such as Rforex, Yaibroker.com and Vistaforex.com. (currently the owner of the floor was caught by the police in May).

Fraud and manipulation brokers
Fraud and manipulation brokers

Speaking of which, I would like to reiterate that choosing a reputable Forex broker for trading is a matter of survival. You can see 2 more articles about: top reputable Forex brokers and 1000+ scam Forex brokers related to choosing a Forex broker.

Is slippage harmful or beneficial?

As I briefly mentioned above, slippage can happen in the opposite direction (positive slippage), in which slippage will help you add profits to your account due to the difference. However, positive slippage is rare because you also have to pay for other costs in the transaction.

Is slippage harmful or beneficial?
Is slippage harmful or beneficial?

Either way, slippage trades affect your trading strategy, and you lose the initiative to some extent in forex trading.

Ways to overcome slippage

First, you need to know the fact that “sliding is the nature of the market” , so you cannot completely eliminate the problem of slippage, but can only overcome and reduce the negative effects. caused by price slippage.

Ways to overcome slippage
Ways to overcome slippage

Here are the most commonly applied slippage fixes:

Add slippage to the transaction fee

You need to observe the number of slippages that occur when you trade a certain currency pair over a period of time, what is the average value of the slippages, and then add this number to the transaction cost. . This is your actual transaction fee.

Choose a reputable Forex broker

Reputable Forex brokers help you avoid price manipulation from fake brokers. Moreover, there are many Forex brokers that have a fairly stable bid-ask spread in most trading time frames. This means that the frequency of slippage will be significantly reduced.

Use stop loss – stop profit order

Risk management orders such as stop loss – stop profit will help you not to trade at unexpected prices, thereby reducing slippage.

Do not use market orders

Market Order, also known as market order, is a type of order execution at the current price in the market, this order helps you buy and sell instantly (high liquidity), but it can also make the matching price different. what you want. Limit Orders, also known as limit orders, allow you to execute orders at the price you want (but the downside is lower liquidity).

Do not trade before and during market news

A simple way to avoid slippage is to avoid trading when there is news regarding the currency pair you trade. This is the best and easiest way to do it, you just need to keep an eye on the economic calendar to avoid news periods.

Trade less volatile assets

If you’re just starting out in forex trading, you should focus on learning less volatile, low-spread pairs like EUR/USD, USD/JPY, GBP/USD, and USD/CHF .

In addition, you can also consider issues such as: using VPS in Forex trading, using low leverage, etc. to overcome slippage.

Conclude

In forex trading, slippage is an unavoidable problem that any trader has encountered, or will encounter in transactions. Slippage also occurs in all other markets such as gold, silver, cryptocurrencies, commodities… the problem is that investors need to know how to overcome slippage.

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