Slippages in financial markets is not something traders are particularly looking forward to. In today’s article, we shall explore this concept, what it means in forex and other types of markets and why it can be dangerous for certain type of traders.
1. Slippage: What Is It and When Does It Occur
2. Reasons Behind Slippages
3. Who Is Slippage Dangerous for
4. Forex Slippage: Is There a Way to Protect Yourself
Essentially, slippage is when a buy or sell order is executed at a different price than the one defined by the trader with a error limit of several pips.
1. You place an order to open a position at the market price. By the time, “Buy” or “Sell” button is pressed, the price changes. A broker offers you to open a trade at a price which is different from the initial one. This type of slippage is called requote.
2. Stop loss slippage happens when the trade closes at a price which is different from the price of the stop loss. Typically, this doesn’t benefit the customer of the broker and thus the loss per position will be higher.
3. Slippage also takes place when trades are closed with take profit or manually. In this scenario, the profit is smaller than the anticipated one.
Slippage can be explained by both market factors and specific features of the broker’s operation. In the first instance, the quote slippage takes place against the backdrop of high volatility regardless of the traded asset and a type of market. The price changes so quickly that there is not enough time for the trade to get executed at the price which existed at the time of order placement.
The reasons linked to brokerage company include:
If your internet connection is on a slower side, the order given to the broker can be delayed and the desired price will already be gone by that time. The order execution speed of the brokerage company depends on its technical capabilities, as well as work ethics of the broker itself. When it comes to so-called forex kitchens (i.e. companies that do not withdraw customer transactions from liquidity providers), these slippages are often triggered artificially in order to profit from customer’s losses.
As far as forex account types go, STP brokers like Gerchik & Со put their best foot forward to protect their clients against market slippages. There is no way to shield oneself from this unfortunate thing since it has a market nature. With that said, you can keep it to a minimum.
Open an account at Gerchik & Co
If your trade has been opened according to a different price or closed not the way you wanted it to (stop loss or take profit slippage), a portion of the profit worth several pips will be lost.
If you are trading medium-term or long-term strategies and your profit is normally dozens or even hundreds of pips, you don’t need to be scared of the slippages. Even if they take place, they will be pretty insignificant in the grand scheme of things.
In contrast, if you are an intraday trader and scalper, slippages can be detrimental. If a trader tries to take 5-10 pips of profit and encounters 2-pip slippage, it will already be quite tangible. There’s a good reason why scalpers are recommended to exercise extreme caution when picking a brokerage company and a type of trading account.
The strategy aimed at protecting you from slippages should be based on proper understanding of reasons behind it. It is possible to eliminate these scenarios by picking the right broker:
Aside from that, make sure that you have a high-speed Internet.
When it comes to slippages of market nature, we need to keep in mind that the majority of them occur during the release of major news which trigger a spike in volatility.
If you are using news trading strategies, here’s what you can do:
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