What is slippage when financial trading?
When you place a trade on the financial market online, you are required to set your position at a specific price of your choice. However, a common occurrence that can take place when you request a price is slippage, which is where your trade is set at a level that differs from the price that you chose. Slippage occurs because the financial markets are highly volatile and can be affected by short term changes in supply and demand, for example.
Slippage can also take place when you place a pending order, which is an agreement to buy or sell an instrument at a predicted future price. Slippage may occur in this instance, because the future is uncertain and therefore, the rate that you requested may not be available when the time comes around, and so your order will be fulfilled at the next available rate.
Slippage can occur when partaking in forex trading and the best way to manage it, and avoid being caught out when it affects your trade, is to understand the past performance of the currency or instrument and check for economic news updates.
Will slippage negatively affect my trade?
On some occasions, slippage can negatively impact your trade. This is because the trade may be executed at a price that is less favourable than your requested sum. However, slippage isn’t always a bad thing and you can often benefit from its effects. In some cases, the price at which a trade is closed may be an improvement on the value that you requested, providing you with greater value.
Is slippage avoidable?
Since the volatility of the market cannot be controlled and is not influenced by the broker, you cannot avoid slippage. Trades take place in real time, therefore any key economic or political events that take place on a day-to-day basis could affect markets and cause the markets or exchanges to enforce slippage upon your trades.
As an investor, you will most likely succumb to the effects of slippage during your trading journey, however, you can employ risk management tools like a guaranteed stop. A guaranteed stop is a form of stop-loss tool that does exactly what it says on the tin. When your position reaches the price that you initially requested, it is guaranteed to stop at that level.
Slippage in the forex market
The forex market is particularly volatile and can be directly impacted by macroeconomic factors, like a nation’s unemployment rate, for example, which will have an adverse effect on that country’s economy. When volatility is high in the forex market, your trade may experience slippage, and although forex dealers will provide you with the next available price, this will be a different rate to that which you requested. Slippage can also occur in the forex market when currency pairs trade outside of optimum market trading hours.
Although slippage is unavoidable in the forex market, there are certain currency pairs that are less likely to experience its effects. Some currency pairs are more liquid than others, like the Euro and US Dollar (EUR/USD) and are less prone to slippage, however, they are not immune, so be prepared for price discrepancies to occur.
Since slippage cannot be avoided, you should treat it as an eventuality and keep up to date with the latest economic news updates to help you to pinpoint when it is likely to occur. Of course, when positive slippage occurs you can benefit from price discrepancies, but this is not always the case unfortunately, so make sure to do your research and employ risk management tools wherever possible.