Slippage in trading: 5 ways to avoid or minimize it
Slippage is a pretty hot topic now. The Forex market is volatile due to plenty of reasons. The higher risk is another side of high volatility as the positions of market makers depend on what is going on in the world. We’d like to dig deeper into this subject and sort out which factors take a toll on Forex slippage.
Causes of slippage
First, let’s clarify what’s slippage in Forex trading. In brief, slippage is a difference between the expected price at which an order should be executed and the price at which it is executed. Slippage occurs when your request was sent but the price has moved at that time. Positive slippage occurs when a trader gets a more favorable price, while negative slippage is about the price that’s worse than expected.
Slippage is one of the most important things in trading you need to be aware of. Of course, slippage happens in all market conditions. At FXCI, we know it firsthand. But it’s inevitable in markets with high volatility. Markets get faster and market slippage becomes more frequent and common.
Here are a few causes of slippage that occur when trading on Forex:
- The bid and ask prices change at that very moment the order is processed;
- The higher volatility increases the risk of slippage. The slippage is larger if the price is changing quickly;
- Limited liquidity at one price level, which is not enough to fill the order. Thus, the order proceeds to the next level or the limit price;
- Gapping prices. Gaps can occur when markets reopen after closing at a different price. Oftentimes, stocks have gaps from one day to the next. Forex prices also may have gaps following news announcements or over the weekend.
Five ways to avoid or minimize slippage
It’s worth remembering that trading slippage itself isn’t bad at all. Oftentimes, it results in more favorable prices on some orders. There are some ways to avoid slippage – or at least, reduce it. For newbies, here are the five things to try:
1. Don’t trade in periods of high volatility
Avoiding slippage in trading is almost impossible. No one can predict when it might happen. Like it or not, it occurs and no one has control over it due to its nature.
The best way to prevent major slippage is to take a break when significant news announcements are occurring. In modern days, any information about inflation, war, oil, or political change can gap and slip the market dramatically. News as earnings announcements for stocks or economic data releases can also cause price fluctuations and gaps. This is extremely important for scalpers that open and close positions in a matter of seconds. If slippage can affect your account, it’s best not to be in the market around predetermined news releases.
2. Trade on the markets with low volatility
With volatile assets, price movements are pretty quick, which increases the chance of slippage. Less volatile markets usually have less slippage.
Therefore, if you’d like to minimize slippage, trading on markets with low volatility and high liquidity is the right thing to do. Not only can this help you get in and out of trades in short order but it also comes with minimal impact on your trading account.
3. Use a boundary order
It might be very specific to get into a particular entry point. And that is really what boundaries provide access to. It gives a trader more control over the execution than ever before.
What exactly does a boundary order do? It allows a trader to reject the trade in case the execution price is bigger than 0.1 points away from the price on the screen. They just don’t get into them. And that’s the whole essence of boundary orders!
4. Place stop and limit orders
Different types of orders can be placed in the Forex market. They fall into two buckets:
- Market orders are placed for buying or selling at the best price;
- Pending orders include Buy Limit, Buy Stop, Sell Limit, Sell Stop orders.
When placing a market order, you don’t control what price it will actually be filled at.
A limit order is an order to buy or sell once the market gets the “limit price”. A “Buy Limit” order allows you to buy at or below a specified price. A “Sell Limit” order is for selling at a specified price or better.
Usually, the low-slippage Forex brokers offer the option to place these orders on your trades. This helps you avoid slippage by ensuring your positions are only open and closed at a specified price.
In this regard, it’s worth mentioning slippage tolerance. These settings on trading platforms allow you to figure out how much price slippage you can accept so that your order can be executed.
If you haven’t set a price tolerance and the market slips, your broker just accepts the next available price. At the same time, setting a price tolerance means you can limit this difference. It will give you more control over your risk.
5. Check if your provider treats slippage
Another thing to know is that in Forex, trading slippage should be treated by your provider properly. Many prop firms adjust the opening and closing prices of the trade. That way they make sure traders can handle the slippage. It makes sense to check these policies about your brokerage before starting trade.
All in all, slippage is unavoidable and there’s nothing to do about it. The only other way to avoid it is to divide your trades into small portions. You should place the stop loss and entry prices at different intervals. This will allow you to get filled at the best available price, but the risk will be reduced by following the tips mentioned in this article. You should generally avoid volatile markets, trade with high liquidity, and use specified orders. By doing that, you can reduce the amount of slippage greatly.
At FXCI, we understand that slippage can be frustrating. As the Forex market heats up and gets wilder, be careful about your trading there! Sometimes taking a break is the best thing you can do to prolong your funded trading account experience.