When you execute a forex trade, you want that trade to be executed at your quoted price. That assumption, though, is contrary to the messy reality of slippage more times than the vast majority of traders will ever want to admit. Decades ago, I saw a well prepared trade run scores of pips against me, all because I did not factor in the speed with which prices would move during market news. The lesson stuck: Understanding Forex slippage is not an option if you are to have consistent results in the FX universe.
Cutting Through Confusion: Really what Slippage means for the Forex traders.
Have you ever put on a trade only to have it get hit at some higher price not even close to what it traded? That’s slippage the silent factor that can turn winning into losing traders overnight.
What Is Forex Slippage?
In its most basic definition, forex slippage is the discrepancy between the price you think you’ll receive and the price you end up receiving when your order completes. It’s not some freak anomaly, it is continuing reality, in forex markets even veterans run into this all the time.
Just imagine slippage as when you go online to order something for $50, and when your card is charged, you see $52. Much the same concept, but possibly with bigger consequences.
When Slippage Strikes Hardest
Slippage doesn’t hit randomly. It’s most common during:
- Massive news events, such as interest rate announcement or an employment report
- Minor liquidity hours when there aren’t as many traders around (Asian session for EUR/USD pairs)
- Changing market conditions where prices fluctuate a lot
More significant slippage is also recorded in larger trade sizes. It becomes tricky looking for enough counterparties when you are trying to deploy 10-lot order at your level.
The Two Faces of Slippage
Here’s something traders often forget: slippage works both ways.
- Negative slippage: You pay more or sell less than you should have on the market
- Positive slippage: You trade up or down prices compared to what was expected of you.
Funny how we don’t celebrate when positive slippage materializes, but feel the bite of the negative slippage every now and then. Our brains work such that we are more likely to remember losses than gains.
Why Slippage Matters So Much
As slippage can radically change the end of the trade result, especially for scalpers or day traders, who trade with narrow stop loss, this can widen it significantly. A few pips of slippage may not be much, but if your strategy is determined by 5-10 pip movements, it’s a biggie as far as the bottom line goes.
For swing traders, the effect is not so catastrophic, but significant on long-term scales as that of a small tax on your trading account which grows up with every transaction.
Knowing about slippage isn’t about learning what it is it’s about using its existence in your trading scheme before it happens and hits you right in the face.
Your Anti-Slippage Toolkit: Tools, Habits, and Broker Choices
Tired of slippage reducing your earnings? You’re not alone. The good news is that today’s forex traders can take advantage of all the sophisticated tools used only by institutional players before. Let’s see what you have to fight slippage with.
Automated Trading Systems: Your Emotion-Free Execution Partner
The human mind is surprisingly smart, but it’s slow in relation to computers. Automated trading systems trade orders in milliseconds and significantly cut your slippage risk. These systems follow your pre-set rules without question and feeling.
And the best part of it – you don’t have to be a hedge fund to use them. Nowadays, a lot of retail platforms present friendly tools for automation that can:
- Execute trades with millisecond precision
- Remove emotional decision-making delays
- Maintain consistent execution parameters
Price Aggregation: Access to Multiple Liquidity Pools
Wondering how some brokers ever seem to provide better fills? Much of the time, their secret lies in their price aggregation technology.
This tech brings together the liquidity from a variety of sources: banks, institutions, and other providers, birthing deeper markets with tightened spreads. The result? A more even pricing and lower fill discrepancies.
When seeking a broker look for the ones advertising several liquidity providers. Such arrangements normally translate into acceptable execution quality for you particularly in the adverse market conditions.
Slippage Controls: Setting Your Boundaries
At other times, the best tools are the most simple. Several platforms now allow customizable slippage controls that allow you to set permissible margins for deviation in price.
For instance, you may specify a parameter to the effect that:
- Will only accept fills within 1 pip of the price given on your request
- Automatically deletes orders in the case the market leaves your comfort zone.
- Makes you more certain during fast changing market.
These controls, as such draw a rotten line in the sand that safeguards you against extreme slippage conditions especially during news-releases or abrupt market gaps.
Choosing the Right Broker
Your choice of broker has a major effect on your slippage experience. The ideal partner should offer:
- Fast execution infrastructure
- Different liquidity providers for stable price quotes
- Transparent slippage policies
- SMART orders and execution controls
Remember that the least expensive route is not always the best – a small increase in commissions can lead to much better fills that end’s up saving you money.
Human Nature and Slippage: Classic Errors and Real Trader’s Lessons
Human nature is usually our enemy in trading. Our very instincts may triumph over rational thought when there is a chance for an easy profit. That’s why mastering what common mistakes are associated with slippage is important for your trading success.
The Risk Management Trap
A skipping of risk management (such as position sizing and stop-losses) is a popular and painful mistake. It’s amazing to see how many traders jump into positions without computing their exposure or establishing clear exit points.
When there are no such protective measures as these in place and markets turn against you, slippage becomes multiples more dangerous. Budget changes can liquidate your exits at prices, far adverse as expected, magnifying losses greatly.
The data doesn’t lie. Not using stop-losses and the correct position sizing has been mentioned as major loss factor in history’s most famous blow-up of traders.
The Leverage Multiplier Effect
Overleveraging magnifies the risks of the so-called slippage effect much more drastically than most people presume. Consider it – in using 50:1 leverage it doesn’t just make your profit potential 50 times greater, it also amplifies slippage impact to the same magnitude.
Highly leveraged positions, when they meet reasonable slippage, can be catastrophic. A small margin against you can get out of control very quickly especially when things are volatile and you run the risk of losing a whole trading account.
Remember: Large leverage increases size exposure to the slippage effect. What could be a comfortable slippage in a standard sized lot would be catastrophic on an overleveraged position.
Learning from Market Masters
Great veterans in trading such as George Soros and Paul Tudor Jones established themselves using discipline in execution and ability to adapt in the disorder markets.
It was during “Black Wednesday” in 1992 that Soros made his famous pound sterling trade not only by market insight, but by qualitative planning that incorporated slippage risks. His team realised that regardless of how bright analysis actually is, without proper implementation, it is nothing.
Also, Paul Tudor Jones survived the 1987 market crash by paying more attention to slippage management. When others panicked as markets crumbled Jones had systems that would ensure that his execution was as disciplined as ever through extreme volatility.
The Takeaway for Your Trading
These insights from masters of market brings out a central lesson; it doesn’t only take entry signals and analysis of the market to make successful trading. It’s about honouring the mechanics of execution – slippage included.
With good risk controls, appropriate use of leverage and an education in how the savvy traders have dealt with volatile markets, the slippage becomes a manageable part of your trading career rather than a potential catastrophe.
TL;DR: Forex slippage is the one that almost nobody knows about, but it eats into profits especially when there is volatility. Learning why slippage happens, a toolbox, and sane trading habits, with the right broker, you can cut unexpected losses a lot.