In forex trading, slippage refers to the difference between the expected price of a trade and the actual price at which the trade is executed. This phenomenon often occurs during periods of high volatility or when large orders are placed in a low-liquidity market.
In This Post
Causes of Slippage
Slippage typically happens when there is little market liquidity or when the market is extremely volatile. Order placement and execution take a long time because there are fewer participants in markets with low liquidity.
Even faster than filling an order, the price movements in the volatile markets happen quickly. As a result, it can occur when an asset’s price fluctuates over time.
This phenomenon typically happens on less well-known currency pairs in forex trading, like AUD/JPY, because highly popular currency pairs have high liquidity and low volatility.
For instance, an investor chooses to open a position at the quoted price of $0.6025 on the extremely volatile currency pair, AUD/USD. The price may have gone up to $0.6040 during the interval between the order’s submission and execution, though. Since he or she will be trading at a higher price than expected, the investor will suffer a slippage.
It frequently happens during or close to significant events, such as announcements about monetary policy and interest rates, a company’s earnings report, or changes in management roles. The events raise market volatility, which raises the possibility of slippage for investors.
Most times, it may occur for investors who hold positions after markets close and the market reopens. It occurs because any announcement or news event that might have occurred during the market’s closure could have caused the price to fluctuate.
Types of Slippage
- Positive Slippage: Occurs when a trade is executed at a better price than expected, leading to increased profits.
- Negative Slippage: Happens when a trade is executed at a worse price than anticipated, resulting in potential losses.
How to Minimize Slippage
Use Limit Orders:
Limit orders allow traders to specify the exact price at which they want to buy or sell, reducing the risk of price changes.
Trade During High Liquidity Hours:
Forex markets are most liquid during major market sessions like London and New York.
Monitor News Events:
High-impact news releases can cause sudden price movements, increasing the risk of slippage.
Choose a Reliable Broker:
A broker with fast execution and minimal spreads can help reduce this occurrence.
How Does This Affects Forex Traders
Increased Trading Costs:
Negative slippage can lead to higher transaction costs.
Reduced Profit Margins:
It can erode potential profits, especially for scalpers and day traders.
Emotional Stress:
Frequent occurrence of this can frustrate traders and lead to poor decision-making.
Conclusion
Slippage is an inevitable aspect of forex trading, especially during volatile market conditions. By understanding its causes and implementing strategies to minimize its impact, traders can better manage their risk and improve their trading performance.
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