Most of the time we brought up slippage to the surface, many traders would take it as miniscule, almost negligible, and sporadical factor. Those are the few of misconception of what that seemingly tiny things can add up over time against your margin. More so, slippage can be proven killer of many news traders due to market's volatility during illiquid period.
Most of the time we brought up slippage to the surface, many traders would take it as minuscule, almost negligible, and sporadical factor. Those are the few of misconceptions of what those seemingly tiny things can add up over time against your margin. More so, slippage can be a proven killer of many news traders due to the market's volatility during illiquid period.
Slippage is one of the most widely known forex broker cheats. It happens when your market order is filled (or executed by the broker) at different price than your originally requested price. Onward in this article, we will discuss how slippage can happen and how to overcome it.
Slippage Can Be Your Friend Or Foe
Even though the price slipped, we wouldn't always end up losing bits of our earned pips. Some brokers with NDD (No Dealing Desk) account type may support access to liqudity provider (ECN/STP) and gives you the next best price so long as liquidity is available.
So, let's say a buyer opens a position to buy EUR/USD pair at 1.1300, there will be two possibilities when a slippage occurs:
- Positive Slippage, when order is transmitted the price suddenly changes to 1.1290 (10 pip below our requested price), the price is going to be filled at that better price.
- Negative Slippage, the price suddenly hikes up to 1.1310 (10 pip above our request), unfortunately the filled price will be registered at that worse level.
Why Does Slippage Happen?
Slippage mostly happens whenever there's an imbalance in the market. Elaborated, that imbalance is actually a huge gap in trading volumes and requested price difference between buyers and sellers.
Let's take at a look at a real-world possible case, a trader is waiting for the US NFP report release while he's trading in EUR/USD pair. He predicts that report to be better than expectation, therefore he set a sell-stop (pending order) to be triggered during the news release date.
Next thing he knows, his prediction came true. Short (sell) positions suddenly sky-rocketing in anticipation of that news as many traders are looking to sell their Euro and buy the surging US Dollar. Subsequently, EUR/USD plunges about hundreds of pips almost instantly.
The huge gap of short positions versus long (buy) positions illustrated above created imbalance where slippage can occur. If an order is transmitted or triggered just around that very illiquid moment, most likely the order will be filled as far away as that sudden drop of pips, at much better or worse than the originally requested price.
It's worth noting when the illiquid moment struck the market, the spread is already spanning wide. Practically less enticing for a late entry as the trading cost itself is too high.
How To Overcome Slippage
Slippage, more often than not, is ignored by traders, especially by beginners. In normal market conditions, price slippage rarely occurs (even if they do, the price slips by slight difference). However, if you are a news trader or a scalper, your ignorance of slippage will cost you very dearly.
News traders may get their margin blown out instantly as slippage during high impact news can move beyond set stop loss. While scalpers will continually suffer unexpected losses from small spikes of price.
See also: Best Forex Brokers for Scalping
To mitigate those potential damages to your margin, we should utilize these methods:
A. Limit Order
Commonly, we use limit order to open new position or to close an existing position. Limit order guarantees filled price at our requested price or better.
If we request a buy limit at 1.1301, the price will only be filled at 1.1301 or below. If available prices is not the same or better than requested price, the limit order will stay on wait.
B. Market Order Deviation Range
Some brokers enables feature so we can estimate our tolerance to slippage.
If you set the maximum deviation to 3 pips, the order will be filled as long as slippage is equal to 3 or below. If the price slips beyond set maximum, the order won't be filled.
Please note that we can't fully control slippage as it is a natural factor of a trending or highly volatile market. You may also check if your broker is either a market maker or directly connected to interbank, as they will handle slippage differently.
So here we are, a little bit more informed about forex steep learning curve. If you got more strategy or hints to work around sudden slippage(s), feel free the leave comment below.