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What is Slippage in Forex?

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What is Slippage in Forex?

The term slippage is something you will often hear reference to if you are trading forex, or perhaps when you are researching with the intention of joining a new forex broker, or trying out a new trading platform.

Digging a little deeper to define what slippage actually is, and the explanation is quite simple. Slippage is the difference between the expected price of an asset when the trade was ordered, against the actual price that the trade was executed at.

Here we will examine a little more in depth as to how forex slippage occurs, and how you can best manage to avoid these situations.

When and Why Does Slippage Occur?

Any price change in your asset could hypothetically lead to slippage on the trade. The reality is though, that slippage is only likely to become an issue if the market is in one of two situations.

The first of these is when the market is not busy, so there are lower volumes being traded at that particular time. These volumes, no matter the reason they are present, can cause prices to change quite rapidly since there may not be sufficient support to maintain a certain price. These changes may not be very huge movements, but they can cause slippage.

The second major reason behind slippage in the forex and others, is market volatility. Within the forex market there may be periods of time where certain currency pairs or assets are subject to increased volatility. This could be due to certain important news, events on the economic calendar, or as part of wider economic conditions. This kind of volatility can again cause prices in to change very quickly which can result in slippage.

While there is no way to exactly know when slippage is going to occur, since it is often down to very small time windows where the prices change in less than a second, you can do your best to identify particularly common periods. Peak trading hours for the forex market are also likely to coincide with much higher volumes for example. The period of time around important economic announcements may also leave you open to slippage depending on how the market reacts.

Positive and Negative Slippage

Since slippage refers to any movement of the price between order and execution, then this can go in both ways. Slippage can be positive when the ask price of an asset decreases before the order is executed in a long trade.

Taking a look at an example, the bid/ask in the EUR/USD market may be 1.08/1.09. In this case, you will be expecting that your order is filled at the price of $1.09. If however, in the fractions of a second that it takes for the order to be executed, this price changes to $1.085, then you will have benefited from positive slippage since the ask price has dropped and the trade will have been executed at the better price.

Negative slippage is the exact opposite of this, and occurs where the price has risen slightly before order execution but the trade is then filled at the higher price meaning that you end up paying slightly more than you had first anticipated.

How common is Slippage in Forex?

Although slippage in forex is reducing more and more with the increase in order execution speeds, it still does occur. Almost all of the best forex broker choices you could make when you start trading try to negate the impact of slippage as much as possible. This can include adapting the methods they use to execute orders, or through special features that can manage to combat slippage.

Despite best efforts though, slippage is still something that you will have to take into account when you start trading forex. With that said, there are a number of ways that you can help protect yourself from slippage on your trades.

The Best Ways You Can Avoid Slippage

As a forex trader, one of the first things you can do to reduce the occurrences of slippage is to make sure you choose a forex broker that provides the fastest execution speeds possible. This should reduce the time between order and execution, where slippage can occur. There are also two other key ways that you can reduce your exposure to slippage.

Manage Your Order Types

Slippage most commonly occurs when entering a position with a market order. This leaves you subject to a small window of change in the market, with the trade still being executed at the different price due to the nature of the order.

The most effective way to combat this is to utilize limit orders. This will mean you are not exposed to the possibility of slippage, but your limit orders may not be filled right away. Here, you have to choose between getting into the position quickly with the potential for some slippage, or having the time to wait and fill your order at a particular price.

Another place where slippage occurs most is when exiting a position. The most effective way to manage this is to have a stop loss in place. You can still experience some slippage even with a stop loss, though it will leave you in a much better position if the market is volatile.

Be Careful When Trading Around Economic Events

The period of time around major news and economic events can be the most volatile time in the forex market. This is typically a time when many are moving around their position and trying to preempt the news that is to come, or reacting to an announcement that has just been made. This market volatility causes an increase in the occurrence of slippage.

Since these announcements, news, and data releases can result in much more market movement than usual, it is typically recommended that you avoid trading during these events. The outcomes can be unpredictable and moving in to, or out of a position during these times can be very difficult at your desired price.

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Anthony is a financial journalist and business advisor with several years’ experience writing for some of the most well-known sites in the Forex world. A keen trader turned industry writer, he is currently based in Shanghai with a finger on the pulse of Asia’s biggest markets.

Forex

EUR/USD Forex Market Holds at New High Despite Continuing US Unemployment

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EUR/USD Forex Market Holds at New High Despite Continuing US Unemployment
  • Euro Holds Two Month High Against Dollar
  • European Markets Continue to Remain Optimistic
  • GBP/USD Growth Impeded by Possible Rate Change

US markets opened positively again today with the Dow Jones trading up more than 100 points to mark a sustained week of growth for markets. This has generally pushed the forex market into a more positive position as traders move away from the relative safety of the US Dollar sensing more positive times ahead. American unemployment numbers though remaining high, also point in a more positive direction.

Euro Pushing Higher Against Dollar With More Stimulus Expected

The Euro is continuing to hold its ground above the 1.10 mark as traders seem to be looking beyond more negative data coming from the US. An additional 2.1m Americans filed for unemployment last week according to the Labor Department today. This is still a huge number which would be record setting in other times. That said, forex trading seems to have been buoyed more by the 4 million drop in continuing claims. This would appear to illustrate that some Americans at least, are starting to get back to work.

With increasing hopes that the economy may be turning a corner, the EUR/USD market has emerged from a slump through the course of the week. Forex brokers note that there is much more of a risk on attitude than previously. Many hopes have also been carried by the announcement of a fresh 750 billion Euro stimulus package from the ECB. This will help the economy back on its feet as more and more countries continue their staged reopening.

US-China Relations not a Huge Concern

US-China relations appear to be continually worsening as we move toward the weekend. This comes off the back of a controversial national security law passed in Beijing which may pave the way towards less autonomy for the region. This is according to US Secretary of State Mike Pompeo at least. He has already stated his belief that Hong Kong is no longer autonomous from China. This could in turn cause difficulty in trade between the US and Hong Kong.

These comments though do not appear to have impacted markets at all. European markets continued to trade higher across the board earlier in the day. A positive sign that traders are shifting focus away from geopolitical matters and focusing solely on the economy.

Negative Rates Possibility Hurts GBP/USD

The one major forex market that has fallen back slightly today has been the GBP/USD. Sterling has failed to capitalize on weaker dollar having hit high points earlier in the week. The pound has lost about 2% on the Dollar through earlier trading in Europe.

Much of this loss seems to be stemming from the possibility that the Bank of England will impose more monetary easing measures to help stimulate the UK economy as it battles coronavirus. It is widely expected they will move toward a historic negative interest rate in the week ahead.

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EUR/USD Forex Market Holds at New High Despite Continuing US Unemployment
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EUR/USD Forex Market Holds at New High Despite Continuing US Unemployment
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GBP/USD Forex Market Among Those to Benefit From Positive Sentiment

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GBP/USD Forex Market Among Those to Benefit From Positive Sentiment
  • Pound Surges to Two-Week Highs on Reopening Hopes
  • Several UK Political Concerns Brushed Aside
  • US Markets also Jump as Optimism Prevails

The first day of trading after the Memorial Day break on Monday looks set to rejuvenate forex markets and the wider economy with a positive push. This comes amid widespread hopes of a coronavirus breakthrough, and increasing positivity that the US and global economies will be back open for business very soon. The tone has been well set by the GBP which has brushed aside political concern and controversy to reach a high point.

GBP Reawakens With Strong Positive Momentum

There had been a lot of concern surrounding the Pound and the British economy in general going into this week. The nation appeared confused by a host of unclear distancing guidelines, and has in recent days been swarmed by domestic political problems. These problems stem from a 260 mile March trip made by chief advisor to the PM, Dominic Cummings. It is alleged that he broke lockdown regulations to stay with his family as both he and his wife developed COVID-19 symptoms.

This news has caused outrage among the British public and ignited political rivalries, though it seems to have had no adverse impact on the forex market. The Pound has been buoyed by positive market sentiment which has worked to weaken the US Dollar as forex traders begin to venture outside the safe haven. At the time of writing, the pair was hitting a two-week high point about $1.23 and still moving in a positive direction.

Sterling Push is Ignoring Several Political Factors

Traders are not only ignoring the misstep of the Prime Ministers team in their surge to back Pound. They have also managed to look beyond the impending Brexit deadline of June 2nd when the transition period could be extended. Despite the apparent lack of any agreement, and the ongoing strain of the Pandemic, UK leader Johnson has repeatedly ruled out any extensions to the period.

The fact that the Bank of England remains open to imposing a negative rate to help stimulate the economy moving forward, is something else that traders seem to be ignoring. Negative rates could see people paying to save money. Implausible though it may seem, the BoE has refused to rule this out as an option. It is possible however that both of these factors have already been priced into GBP/USD trading.

US Stocks Surge With Huge Rally

The positive feeling in European markets carried over to the opening bell on Wall Street as the Dow Jones jumped 600 points and the S&P 500 index surged more than 2% to above 3000 for the first time since early March.

These positive movements were most strongly felt in companies directly impacted by the virus outbreak as hopes continue to grow that the economy will be back in full swing soon. More positive news on virus trials has further been a further boost for traders.

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GBP/USD Forex Market Among Those to Benefit From Positive Sentiment
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GBP/USD Forex Market Among Those to Benefit From Positive Sentiment
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Forex Markets Undisturbed by US Unemployment Data

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Forex Markets Undisturbed by US Unemployment Data
  • EUR/USD Breaks Back Through Significant Barrier
  • Markets Open Lower As Unemployment Rises
  • Improving PMI also Benefits GBP Market

Millions more filed for unemployment in figures released today for the previous week ending May 16th. This news however did not appear to disrupt the forex trading market at all. Here, the EUR/USD managed to climb back through a significant level at $1.10. Sterling has also been managing to hold ground this week, likely boosted by PMI data moving in the right direction today. Markets still dipped slightly though on this morning’s opening bell.

Euro Moving Back to Stronger Position on USD Weakness

Forex brokers have noted a slight step away from the safe-haven status of the US Dollar this week. The Greenback easing up slightly throughout the week as positive drug trials and similarly supportive comments from Fed Chief Powell on the Reserve’s commitment to backing the American economy have given traders a degree of renewed hope.

This hope has translated to strengthening of the Euro as markets there continue to battle back with improving data which is albeit still at a massively low point. The preliminary PMIs for Eurozone manufacturing show an improvement to 39.5 though it is still worth noting that anything below 50 represents a contraction. The ongoing US-China tensions is one point that can drag the pair back, though traders will be hoping this geopolitical situation does not cause further turmoil.

Markets Dip Slightly but Quickly Recover

Major US markets dipped slightly on the opening bell at Wall Street. This after a week of strong rallying which accompanied a steady overall improvement in market sentiment since the beginning of the week. This early dip may well be attributed to the US unemployment claim figures for the previous week. These continue to rise, and are now at a new all-time peak of more than 38 million claims since early March.

This number includes an increase of 2.4 million on the previous week, which, although sees the number reaching a new record high, is actually a significant slowing of the pace. Still more than 25 million continuing claims are on the books. The hope is that as most states begin their staged reopening, that some of these temporary layoffs can be restored and help further boost the economy.

Sterling Also Holding Strong on Improving Data

An improving UK PMI and move away from Dollar safety has also lent some support to the Pound. PMI numbers rose to a preliminary 28.9 for April, almost double that of the previous month, yet still well inside contraction territory. This points to a slowing of the negative impacts though as the UK also slowly gets back to work amid easing lockdown restrictions.

The forex market has also undoubtedly been supported by comments from the Bank of England Governor Andrew Bailey on Wednesday. He commented that the bank were not ruling out a move to negative rates in order to stimulate economic recovery from the coronavirus pandemic.

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Forex Markets Undisturbed by US Unemployment Data
- #1 Broker in USA
- Canadians Welcome
- Over 80 Currencies
- Regulated by NFA, CFTC, FCA, FSA, IIROC & CIMA
- Member of the National Futures Association (NFA# 0339826)

Click Here to Visit Forex.com

Forex Markets Undisturbed by US Unemployment Data
- #1 Broker in UK
- Singapore Welcome
- Australia Welcome
- 12,000 + Global Markets
- Established in 1983
- Authorized & Regulated by the FCA

Click Here to Visit City Index

 

 

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