You may have experienced that sometimes you want to enter the trade at a certain price, but its execution happens at a different pace.
Can you tell why this happens?
This happens due to a phenomenon called slippage.
In this guide, we will break down what currency slippage is, how it works, and how you can avoid it.
What is slip?
When the price at which an order is executed differs from the requested price, it is known as slippage. It is especially common in fast moving, highly volatile markets vulnerable to sudden and unexpected changes in a trend.
It can also occur if you place a large order with insufficient volume to account for the bid/ask spread at the initial price.
It’s still a slip if you pay more or less than what you agreed to.
How does the swipe work?
Slippage is likely to occur when there is a lack of liquidity in the market or significant level of volatility. Few market players are willing to take the opposite side of a trade in illiquid markets.
As a result, there is a longer period between placing an order and executing it after a buyer or seller has been discovered.
The price of an asset may fluctuate due to this lag, indicating that it has suffered slippage. Price changes can happen quickly in turbulent markets, even in the few seconds it takes to execute an order.
Slippage and the forex market
Slippage occurs when an order is placed at a less favorable rate than what you requested in the order.
When trading volatility is high, it is quite difficult to place an order at a certain price in the forex market. Limit orders are the only method to avoid this entirely, but you risk your trade not going through at all if you use them.
Slippage occurs in the foreign exchange market in less popular currency pairs such as USD/MXN and USD/HKD. Forex majors or minors are more liquid and have less volatility.
Forex Slippage Examples
Suppose you decide to enter a long position in the GBP/JPY currency pair, known for its extreme volatility. The broker’s quote for the pair is 0.7020, hHowever, the price may have jumped to $0.7028 in the period the order was placed. In this case, you would have simply suffered slippage as you would be buying at a higher level than you had anticipated.
Examples of Slippage and Differentials
The spread is the difference between the broker’s buy and sell prices, represented in pips. A broker lists both the buy and sell price, so you can determine the margin for each currency pair.
For example, him runner You can charge a spread of 0.8 pips on major currency pairs.
When there is a lot of volatility, a slippage occurs. For example, if you closed a long EUR/USD position at 1.1600 but the price had dropped to 1.1598 by the time the trade was executed, you would have incurred two pips slippage.
Taking into account the examples mentioned above, when you add the spread to the two pips, the total becomes 2.8 pips.
What causes slippage?
Slippage is common in the forex market around or during important News events. Bank announcements on monetary policy and Interest rates, as well as the political climate of a country, can generate greater volatility. This, in turn, can lead to slipping.
You may want to trade before or immediately after the announcement. However, the resulting volatility can make it difficult to get the price you want. To avoid trading during important news, consult the economic calendar.
Which currency pairs are the least prone to slippage?
As mentioned above, due to its high liquidity, major currency pairs they are less prone to slipping. These include EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, NZD/USD, and USD/CAD.
Forex minors like EUR/GBP or GBP/JPY are also not vulnerable to slippage.
Exotics like USD/MXN, USD/ZAR are more vulnerable to currency slippage.
When does the greatest landslide occur?
The largest slippage occurs during a period of high volatility or major news announcements.
Price changes in volatile markets happen quickly, even faster than processing an order. As a result, the price of a pair can fluctuate over time, resulting in slippage.
No currency pair fell 2,780 pips in 30 minutes faster than USD/CHF in January 2015.
In January 2015, the Swiss National Bank (SNB) decided to abolish the EUR/CHF parity. As a result, the USD/CHF fell. Before that day, it was unthinkable that a major currency would move in that direction.
How can the effects of landslide be avoided or reduced?
While slippage is hard to avoid, there are a few strategies that can help. Here are some things you can do to prevent slipping:
Manage risk during ads
You may want to open a trade soon after the announcements to manage the risks. Wait until shortly after the announcement to enter your trade to take advantage of market volatility and avoid slippage.
You can avoid trading during major news events if you are not trading during the day or forex speculation. This will prevent significant or unexpected slippage. You can simply employ a stop loss order to ensure you get out if the value of your assets declines.
Change the type of market orders
Unlike other forms of stops, guaranteed stops they are not susceptible to slippage and will always close your trade at the exact level you select.
As a result, they are the most effective strategy for mitigating the danger of a market turning against you.
Limits, on the other hand, can help reduce the chance of slippage as you initiate a trade or want to participate in a profitable trade.
Do not trade around major economic events.
If you can, avoid trading around major news events. As described above, major news announcements are a big cause of currency slippage. So it is better to wait for the press release and then take positions.
If you have a position open during a major event, you can extend your stop loss and adjust it afterwards.
Trade in low volatility and high liquidity markets
Limiting your trading to the busiest hours will reduce your risk slippage because that is when liquidity is at its peak.
As a result, there is a higher chance that your trade will be completed quickly and at the price you specified.
Now you know everything you need to know about dealing with slippage in your trades!
To reduce currency slippage, use limit orders instead of market orders and avoid trading during major news releases.