Slippage can be a common occurrence in forex trading but is often misunderstood. Understanding how forex slippage occurs can enable a trader to minimize negative slippage, while potentially maximizing positive slippage. These concepts will be explored in this article to shed some light on the mechanics of slippage in forex, as well as how traders can mitigate its adverse effects.
What Is Slippage?
Slippage refers to the difference between the expected price of a trade and the price at which the trade is executed. Slippage can occur at any time but is most prevalent during periods of higher volatility when market orders are used. It can also occur when a large order is executed but there isn’t enough volume at the chosen price to maintain the current bid/ask spread.
forex slippage chart
Slippage in forex tends to be seen in a negative light, however this normal market occurrence can be a good thing for traders. When forex trading orders are sent out to be filled by a liquidity provider or bank, they are filled at the best available price whether the fill price is above or below the price requested.
To put this concept into a numerical example, let’s say we attempt to buy the EUR/USD at the current market rate of 1.3650. When the order is filled, there are three potential outcomes: no slippage, positive slippage or negative slippage.
EXAMPLES OF FOREX SLIPPAGE
- NO SLIPPAGE: The order is submitted, and the best available buy price being offered is 1.3650 (exactly what we requested), the order is then filled at 1.3650.
2.POSITIVE SLIPPAGE : The order is submitted, and the best available buy price being offered suddenly changes to 1.3640 (10 pips below our requested price), the order is then filled at this better price of 1.3640.
NEGATIVE SLIPPAGE: The order is submitted, and the best available buy price being offered suddenly changes to 1.3660 (10 pips above our requested price), the order is then filled at this price of 1.3660.
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