What is slippage?

Slippage can be a common occurrence in trading but is often misunderstood. Understanding how it occurs can enable you to minimize the risk of negative slippage, while potentially maximizing positive slippage.

This lesson aims to shed some light on the mechanics of slippage in forex, as well as how you can mitigate its adverse effects.

What is slippage?

Slippage occurs when a trade order is filled at a price that’s different to the requested price. This normally happens during periods of high volatility, or when a ‘sell’ order can’t be matched at your desired price within the timeframe you set.

Slippage in forex tends to be seen in a negative light. This can be true, as your order can be filled (or your stop can be executed) at a worse price than you intended. This is called negative slippage.

However, this normal market occurrence can also be a good thing. When your forex trading orders are sent out to be filled by a liquidity provider or bank, they’re filled at the best available price – even when the fill price below is the price requested. This is called positive slippage.

Let’s use an example to give you context.

What causes slippage and how can you avoid it?

So how does forex slippage occur, and why can’t all orders be filled at the requested price? It all goes back to the basics of what a true market consists of: buyers and sellers.

For every buyer with a specific price and trade size, there must be an equal number of sellers at the same price with the same trade size. If there’s ever an imbalance of buyers or sellers, prices will move up or down.

If you attempt to buy 100,000 units of EUR/USD, for instance, at 1.3650, but there aren’t enough people (or no one at all) willing to sell their euros for 1.3650 USD, your order will seek the next best available price(s) and buy those euros at a higher price, giving rise to negative slippage.

On the other hand, if there was a flood of people wanting to sell their euros at the time your order was submitted, you might be able to find a seller willing to sell the currency at a price lower than what you’d initially requested, giving you positive slippage.

Forex slippage can also occur on normal stop losses, whereby the stop loss level cannot be honored.

Which currency pairs are the least prone to slippage?

Under normal market conditions, the more liquid currency pairs will be less prone to slippage. Although, when markets are volatile, like before and during an important data release, even these liquid currency pairs can be prone to slippage.

Once you’ve made your choice, log in to your demo account and watch the currency pair you’ve identified a few minutes before the release and continue to watch it as the release happens. What do you notice?

News and data events can increase volatility drastically. You can get ahead by keeping an eye on economic calendars, reading the news and following financial analysts for ideas on which markets to watch.