Understanding Slippage
What is it and How To Avoid in the forex market
What Is Slippage?
When you place an order and the price is not executed at which the trader requested.
This price difference can be positive or negative depending on the direction of the price movement (long or short) and whether you are opening or closing a position.
If slippage were to affect your positions, some brokers would still fill your orders at the worse price.
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When Does Slippage Occur?
Usually, traders experience slippage when the market is experiencing higher volatility, creating susceptibility to unexpected trend movement.
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How Does Slippage Occur?
Slippage usually occurs when there is low market liquidity or high volatility. When the markets are experiencing low liquidity, there are less market participants taking an opposing trade. This leads to more time being required from order placement to execution.
This delay can change an asset’s price from when the trader initially entered the market order.
When It Comes To Forex Trading…
- Slippage most often occurs when volatility is high, and liquidity is low.
- Forex traders usually experience a higher rate of slippage on less popular traded assets.
- The assets that are traded most usually have higher liquidity and lower volatility.
Choose A Reputable Broker
- Regulated brokers usually have a higher reputation and are monitored by the CFTC
- Check reviews of any broker you are considering and make an educated decision before going all in…think of it like this…do you just go with the first insurance or mortgage company that comes along? I hope not… take the time to make the right choice
- Contact the broker you are considering and ask questions that will impact your decision…see what their regulations are on slippage
Network Settings
- Make sure you have a solid connection to the network or use a reliable VPS
- Use a wired connection over wireless (wi-fi)
- When actively trading, turn off all other programs that require the Internet
Terminal Settings
- Open new orders with settings of maximum deviation from the requested price
- Set the maximum value of slippage
- If price goes beyond the identified limits, the order will not be executed
Stick With Higher Timeframes
- Why treat trading like gambling? I personally prefer the D1 timeframe. Although I do take a few shorter-term trades, 90% or more of my accounts are long term
- Choose to push yourself toward higher timeframes and create less stress for yourself…along with a much lower chance of slippage
- News trading will still more than likely push a trader toward lower timeframes, so keep this in mind… follow the rest of the suggestions I’ve given for avoiding slippage and you should be solid! You can also choose to only trade news strategies that enter after the news release has occurred
Trade Markets With Low Volatility And High Liquidity
- Limit your exposure to slippage. Low volatility means that the price is less inclined to change quickly, and high liquidity means that there are a lot of active market participants to accommodate the other side of your trades
- Hours that experience higher activity may also experience a higher liquidity
- Choose popular assets over less popular ones. They usually have a higher liquidity and lower volatility
Execute Limit Orders Over Market Orders
- Limit orders enter the market at a more favorable price than those of market execution orders
- What you are willing to enter at is what it fills at. You define the terms
- Set your pending orders and let them ride! If they fill, they fill…if they don’t, they don’t… move on to the next trade if they don’t
There You Have it!
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