Slippage in forex trading refers to the difference between the expected price of a trade and the actual price at which the trade is executed. It commonly occurs during periods of high volatility or low liquidity and can impact both entry and exit points, affecting overall trade profitability.

Key Takeaways

• Slippage occurs when orders execute at a different price than requested
• It is more common during fast market movements, news releases, or thin markets
• Slippage can be positive (better price) or negative (worse price)
• Market orders are more susceptible to slippage than limit orders
• Understanding and managing slippage is essential for effective risk control

Why Does Slippage Happen in Forex?

1. Market Volatility

During major economic news or unexpected events, price changes rapidly, making it difficult to fill orders at the requested price.

2. Liquidity Constraints

In thin markets with fewer buyers or sellers, the best available price may be significantly different from the requested price.

3. Order Types

• Market Orders: Executed immediately at the best available price, prone to slippage
• Limit Orders: Set to execute at a specific price or better, reducing slippage risk but possibly missing trades

How Slippage Affects Trading

• Negative Slippage: Entry at a worse price or exit at a less favourable price, increasing losses or reducing profits
• Positive Slippage: Beneficial price execution, improving trade outcomes unexpectedly

Managing Slippage

• Avoid trading during major news releases unless prepared for volatility
• Use limit orders where appropriate to control entry and exit prices
• Trade with brokers offering fast execution and high liquidity
• Monitor market conditions and adjust trade sizes accordingly

Case Study: Slippage Impact on a Trade

Anna placed a market order to buy EUR/USD just before a major ECB announcement. Due to sudden price spikes, her order executed 5 pips higher than expected, resulting in a less favourable entry and impacting her risk-reward calculation. Learning from this, Anna now prefers using limit orders and avoids trading around major news without proper strategy.

Tips for Traders

• Always be aware of economic calendars and news schedules
• Test your broker’s execution speed and slippage history in a demo account
• Incorporate potential slippage into your risk management plans
• Use slippage reports if your broker provides them to analyse performance

Frequently Asked Questions

What is slippage in forex trading?

Slippage is the difference between the expected price of a trade and the actual price at which it is executed.

Can slippage be positive?

Yes. Sometimes trades execute at better prices than expected, resulting in positive slippage.

How can I avoid slippage?

Use limit orders, avoid trading during volatile news, and choose brokers with fast execution.

Does slippage affect all types of orders?

Market orders are most affected; limit orders help reduce slippage but may not always execute.

Is slippage common in forex?

Yes, especially during major news events, low liquidity periods, or volatile market conditions.