In forex trading, slippage refers to the difference between the expected price of a trade and the actual price at which it is executed. Slippage often occurs during periods of high volatility or when a market order is used. Essentially, it’s the gap between the price you expect and the price you actually get, which can sometimes work in your favour but is more often viewed as a risk.

In this article, we will explain the concept of slippage in forex trading, why it happens, and how you can manage it effectively. What is slippage in forex trading? Lets find out.

Understanding Slippage in Forex Trading

Slippage happens when there is a rapid price change or insufficient liquidity in the market. When you place a trade, especially during times of high volatility (such as during economic news releases), the price can move before your broker has the chance to execute your order. As a result, you end up paying a slightly higher or lower price than expected.

Example: Suppose you place a market order to buy EUR/USD at 1.2000. However, due to high market volatility, the price moves up to 1.2005 before your order is filled. In this case, you’ve experienced 5 pips of slippage.

Slippage isn’t always negative. Sometimes, the market can move in your favour, meaning you get a better price than expected, but this is less common.

Common Challenges Related to Slippage

Slippage can lead to challenges, especially for retail traders who may not always have access to high-speed execution systems. Some common issues include:

• High Volatility: When major economic reports are released, prices can change dramatically in seconds, increasing the risk of slippage.
• Low Liquidity: During certain market hours or in less popular currency pairs, there may not be enough buyers or sellers at the desired price, leading to slippage.
• Market Orders: Market orders, which are designed to be executed immediately, often lead to slippage since they do not guarantee a specific price.

These factors can cause frustration for traders who rely on precise entry and exit points.

Step-by-Step Solutions to Manage Slippage

Managing slippage is essential to maintaining profitability. Below are some practical steps you can take:

1. Use Limit Orders Instead of Market Orders
A limit order ensures that your trade will only be executed at your desired price or better. This can help reduce the risk of slippage, but keep in mind that it may result in your order not being filled if the market doesn’t reach your limit price.

2. Trade During Liquid Market Hours
Trading during times of high liquidity (such as the overlap between the London and New York sessions) can help reduce slippage. These are periods when there are more buyers and sellers, making it easier for your trades to be executed at the price you want.

3. Avoid Trading During Major News Events
Economic releases such as interest rate announcements, employment data, or geopolitical events can cause extreme volatility. Unless you are specifically trading news events, it’s wise to avoid placing trades just before or after major announcements.

4. Monitor Your Broker’s Execution Speed
Choose a forex broker with fast execution speeds to minimise slippage. Some brokers offer platforms designed for quick trade execution, which can be especially important if you are trading during volatile times.

5. Set Acceptable Levels of Slippage
Many brokers allow traders to specify a maximum amount of slippage they are willing to accept. By doing this, you can ensure that your trade will not be executed if the slippage exceeds your tolerance level.

Practical and Actionable Advice

To make sure slippage doesn’t hurt your trades too much, keep the following tips in mind:

• Plan your trades around liquidity: Trade when the market is active to avoid unnecessary slippage.
• Use limit orders: This can protect you from adverse slippage.
• Keep an eye on the news: Avoid trading during economic reports unless you are comfortable with volatility.
• Monitor your broker’s performance: Choose a reliable broker with low latency.

Frequently Asked Questions

What causes slippage in forex trading?
Slippage is caused by rapid price movements or a lack of liquidity in the market, often during periods of high volatility.

Can slippage be positive?
Yes, slippage can be positive when the price moves in your favour, resulting in a better price than expected. However, this is less common.

How can I avoid slippage?
You can reduce the likelihood of slippage by using limit orders, trading during liquid market hours, and avoiding high-volatility events like news releases.

Is slippage more common with certain brokers?
Yes, slippage can be more frequent with brokers who have slower execution speeds. Choosing a broker with fast trade execution can help reduce slippage.

Does slippage affect stop-loss orders?
Yes, slippage can affect stop-loss orders. In fast-moving markets, your stop-loss may be filled at a different price than the one you set, increasing your losses.

What is a limit order?
A limit order is a type of order that specifies the price at which you are willing to buy or sell a currency pair. It guarantees that you won’t experience slippage, but it might not be executed if the price doesn’t reach your limit.

Why does slippage occur during news events?
News events can cause prices to move rapidly, and the market may not have enough time to execute your trade at the desired price, leading to slippage.

Is slippage common in forex trading?
Yes, slippage is a common occurrence in forex trading, especially during periods of high volatility or low liquidity.

Can slippage be eliminated completely?
While you can take steps to reduce slippage, it is nearly impossible to eliminate it entirely, particularly in volatile markets.

What’s the difference between slippage and spread?
Slippage is the difference between the expected price and the actual execution price, while the spread is the difference between the bid and ask price in a currency pair.

Conclusion

What is slippage in forex trading? Slippage in forex trading is an important factor to consider when placing trades, especially in volatile markets. By understanding what slippage is and how it happens, you can take steps to minimise its impact on your trading performance.

For more tips on managing slippage and improving your trading strategy, check out our latest Trading Courses at Traders MBA.