Slippage in forex trading refers to the difference between the expected price of a trade and the actual price at which it is executed. It typically occurs during periods of high market volatility or low liquidity, where the desired price is not available, and the trade is filled at the next best price. While slippage is common in trading, understanding its causes and how to minimise it can help you improve your trading outcomes.

Understanding Slippage

Slippage can be either positive or negative:

• Positive Slippage: The trade is executed at a better price than expected, resulting in increased profit or reduced loss.
• Negative Slippage: The trade is executed at a worse price than expected, leading to decreased profit or increased loss.

For example:

• If you place a buy order at 1.2000 and it executes at 1.2003, you experience 3 pips of slippage.
• If the order executes at 1.1997, you benefit from positive slippage of 3 pips.

Causes of Slippage

1. Market Volatility: Significant price movements during major news releases or events can lead to slippage.
2. Low Liquidity: Thinly traded markets or off-peak trading hours often result in fewer buyers or sellers at specific price levels.
3. Order Type: Market orders are more prone to slippage as they prioritise execution over price.
4. Latency: Delays in order transmission between your trading platform and broker can cause slippage.

How to Minimise Slippage

Here are practical steps to reduce the likelihood of slippage:

1. Use Limit Orders Instead of Market Orders

• Market Orders: Executed immediately at the best available price but prone to slippage.
• Limit Orders: Executed only at your specified price or better, eliminating negative slippage.

2. Avoid Trading During High-Volatility Periods

• Refrain from trading during major news releases or economic events, as prices tend to fluctuate rapidly.

3. Trade During High-Liquidity Hours

• Focus on trading during peak hours, such as the overlap of major trading sessions (e.g., London and New York).

4. Choose a Reliable Broker

• Select a broker with tight spreads, fast execution, and robust liquidity. ECN brokers are generally better for avoiding slippage.

5. Use Slippage Control Features

• Some trading platforms allow you to set a maximum slippage tolerance. If the market moves beyond this range, the order will not be executed.

6. Monitor Your Internet Connection

• Ensure you have a stable and fast internet connection to minimise delays in order execution.

7. Practise Risk Management

• Use smaller trade sizes during volatile periods to reduce the impact of slippage on your overall account.

8. Test with a Demo Account

• Familiarise yourself with market conditions and your broker’s execution policies in a risk-free environment.

FAQs

What is the difference between slippage and spreads?
Spreads refer to the difference between the bid and ask price, while slippage occurs when a trade is executed at a different price than expected.

Does slippage happen in both directions?
Yes, slippage can be positive (favourable) or negative (unfavourable).

Can slippage be completely avoided?
No, slippage cannot be entirely avoided, especially during volatile market conditions. However, it can be minimised with proper strategies.

Does slippage affect stop-loss and take-profit orders?
Yes, if the market gaps significantly, stop-loss and take-profit orders may experience slippage.

Do all brokers have slippage?
Most brokers experience slippage to some degree, but the extent varies based on their execution model and liquidity providers.

Is slippage common in forex trading?
Yes, slippage is a normal part of forex trading, particularly in volatile or illiquid markets.

What are slippage control settings?
These are platform features that allow traders to set a maximum acceptable slippage range to reduce the risk of significant price deviation.

Does leverage increase slippage?
Leverage does not directly increase slippage but amplifies the impact of slippage on your trading account.

Why does slippage occur more during news releases?
News releases often lead to rapid price movements and gaps due to increased market volatility.

Can slippage occur in limit orders?
No, limit orders are designed to execute only at the specified price or better, preventing negative slippage.

Conclusion

Slippage is a common phenomenon in forex trading caused by market volatility, low liquidity, or order execution delays. While it cannot be completely eliminated, using limit orders, trading during high-liquidity hours, and choosing a reliable broker can significantly minimise its impact. By implementing these strategies and practising good risk management, you can reduce the negative effects of slippage on your trading performance.