When trading forex accuracy is a must. When someone puts an order to buy or sell an asset at a certain price they expect that this order will be completed at that price. But it’s not always like this and some traders fall victim to slippage.
Slippage definition
Slippage is the price difference between the expected price and the actual price at which the order got executed. Slippage can occur when there is high volatility in the market and prices change on a constant basis. Another reason for slippage can be low liquidity as there are not enough sellers and buyers available at the chosen price.
Why is slippage important for traders?
- Slippage can wipe out profits traders made and even cause traders to go negative
- Slippage can also be beneficial for traders and they can close their position with a better price
- Looking at the slippage traders can determine how volatile and liquid the market is
- Limit orders can be used to avoid slippage but they also come with their cons
Thorough Slippage Explanation
Slippage is the difference between the intended price at which the order is being closed and the actual price at which the order was closed. Slippage can occur when the market is highly volatile and prices change constantly and when there is low liquidity and order can not be executed because of the lack of buyers and sellers at your desired price.
Slippage does not always have to be negative. Slippage can also be positive for traders and the order might close at a better price. One way to avoid negative slippage is to use limit orders which guarantees that no matter what the order will be executed at the intended price. But with this, there is a possibility that the price will never reach our limit order and it will be left open.
Example of Slippage in Forex
Right now you should have a rough understanding of what slippage is. But to better understand this, let’s look at an example. Let’s say that trader wished to open a EUR/USD position at the quoted price of $0.975. But when the trader pressed the button to open the position, a sudden change occurred in the market, and quoted price of EUR/USD jumped to $0.980. When the order placed by the trader gets filled he will see that he opened the market position at the price of $0.980 and not the intended $0.975.
FAQs on Slippage in Forex
Do you lose money to slippage?
In most cases yes, but not always. It is not guaranteed that the slippage will be negative for the trader and it can also be beneficial for the trader. But in most cases slippage caused traders to execute orders in unfavorable conditions.
What is slippage tolerance?
Slippage tolerance is the maximum slippage a trader can tolerate. Usually, traders set their slippage tolerance between 0.5%-1%, and orders are never executed if slippage exceeds this mark.