Forex trading is, by no means, an easy journey. There are numerous challenges that traders experience.
Some are day-to-day, while some are so unexpected that you question your years of knowledge. And other categories of challenges come at your door, like an unexpected friend. Slippage comes into the latter category. Though you can’t pinpoint a single reason for its existence, the outcome is unpleasant for traders.
Slippage causes the execution price of a trade to differ from the expected price. It occurs in fast-moving markets or during news events when liquidity is low, causing trades to be executed at less desirable prices. Let’s discuss why slippage occurs and what measures you can take to minimise it.
Table of Contents
Several Factors Contribute to Slippage in FX Trading:
Before we learn how to minimise slippage, we should know what factors are causing it –
1. Market Volatility:
Market volatility is the degree of price fluctuation in the forex market. The higher the volatility, the higher the price movements. As a result, there is a higher chance of slippage.
This happens because, during high levels of volatility, prices can change rapidly, and the execution of orders may lag, resulting in slippage. You should be cautious when trading during such times and may consider implementing risk management techniques to protect your trades.
Liquidity means how easy it is for you to buy/sell your currency pairs without significant price changes. Currency pairs that are traded actively tend to have higher liquidity. This also means that there is a higher demand for that currency pair – which also means a higher chance of slippage because of a smaller price discrepancy between orders.
3. Order Size:
Your order size can also impact the execution price. Only execute larger orders, as they may be fully filled at the requested price and result in slippage. Instead, you could break your large orders into a few small orders. You can use forex calculators to find out the right lot size, along with many other important things that come in handy while trading.
4. Broker Latency
Broker latency is the time it takes for an order to be transmitted from the trader to the broker's server and executed. Lower latency is desirable as it reduces the time delay in executing trades. Choosing a broker with low latency and robust infrastructure can help minimise slippage.
5. News Events
Major news events, such as economic data releases, central bank announcements, or geopolitical developments, have a great hold on the future direction of currency price movements.
Leading to higher chances of slippage, their events cause higher volatility in the forex market. So, you should be more cautious during times when major news or events are relevant so that you can avoid slippages.
6. Internet Connection:
How fast your orders will be executed also depends on the stability and functionality of your internet connection. If your internet connection is slow, it can lead to delays in transmitting orders to the broker, increasing the risk of slippage. So, before you start trading, ensure that your internet is working fine and giving you the speed you require to execute your trades.
7. Trading Volume
Trading volume is the total number of trades placed for a currency pair in the market during a given period. Higher trading volumes indicate higher liquidity and better price stability.
However, traders should avoid the opposite, i.e., low trading volume, as lack of liquidity could lead to slippage, executing their trades at not-so-desired prices.
How Can I Choose the Right Broker to Reduce Slippage?
Below are some of the ways choosing the right broker can help you reduce slippage –
- Location of Broker's Server: Do you know the geographical location of your broker's server could be the reason for slippage? If your broker's server is far from your location, you will experience high latency and more slippage. Given this, you should try a broker with strategically placed servers in your location.
- Transparent Policy for Order Execution: Brokers can have varying order execution policies, which can affect slippage. If you register with a transparent broker with fair execution policies, you will need help executing orders at the requested price or better. This greater control over trade execution will reduce the risk of slippage due to order discrepancies.
- Advanced Technology Implementation: The technology employed by a broker directly impacts order execution speed and accuracy. Sign up with only those brokers that upgrade their technology from time to time. These upgrades should include low-latency trading platforms and sophisticated execution algorithms, as this will ensure precise order execution and less slippage.
- Well-Known Liquidity Providers: Do you know brokers rely on liquidity providers to execute trades? Yes, they do not get “automatically” placed. When you sign up with a broker, make sure you check where this liquidity is coming from. A highly established liquidity provider will ensure the smooth execution of trades, and there will be less chance of you experiencing slippage.
- Responsive Customer Support: You can reduce slippage, but sometimes it is undetectable. In those times, the customer support team is your only friend to confide in. Good customer support will have a quick turnaround time so you can resume trading.
- Account Type and Trading Costs: Brokers offer different account types with varying execution models and trading costs. When you open an account with your broker, you should carefully check all the features provided, as some of them can be very subtle or lead to misinterpretation. To avoid slippage and trading expenses, it is recommended to choose account types with direct market access and competitive spreads.
- Real-time Order Execution Monitoring: Real-time monitoring is a feature that brokers offer traders to keep an eye on their open trades. If your broker doesn’t support this feature, you could lose important patterns that signify slippages or even data that could help you improve your trading strategy.
Optimise Trade Timing:
If you trade at the right time, you can reduce the chances of experiencing slippage. The best trading time to avoid slippage and get access to the best market opportunities is to trade in major trading sessions. During this period, you will have high liquidity. Major trading sessions are loaded with high liquidity and tighter spreads.
Also, as discussed, high volatility tends to increase the chances of slippage. Therefore, avoid trading during this time. High volatility is usually experienced during major news releases or unexpected events.
Use Limit Orders:
Limit orders are another way to reduce slippage. Instead of market orders, you can use limit orders to specify the maximum price you are willing to buy or the minimum price you are willing to sell. When you follow this approach, your trades will get executed at your desired prices, or even better, reducing the chances of slippage.
Monitor and Adapt:
Traders can avoid pitfalls such as slippage if they stay informed. Stay informed about major news events and, carefully choose a broker and, ensure that you have a stable internet connection, be vigilant about every small or big thing that can impact your trading. Even if your trades go as well as you planned, be ready to burn the midnight oil.
Trading requires constant work, so make sure to review and analyse your trading process. Try trading in a demo account to identify patterns or trends that could lead to slippage or hinder your progress.
Identifying slippages in the market is like looking for distant stars with your naked eyes. There are so many reasons why you couldn’t see both. But you don’t have to deal with the problem in the first place if you follow the right approach. You can take advantage of different technologies that will prevent the common reasons that could result in slippages. The two of them are –
- Automated trading platforms: You can use automated trading platforms to place advanced order types and execute strategies based on self-defined rules. This way, you don’t have to trade manually, and you can place trades at a faster pace.
- VPS: VPS will help you avoid latency and increase the speed at which your trades will be executed.
There is never a single reason for slippage to occur. In this article, we have discussed all the possible reasons you could experience slippage. The flaw could be a slow internet connection, a bad trading strategy/approach, or your broker. But the good thing is that you can avoid slippage by being aware of market conditions, picking the right broker, and utilising technology.