Forex trading has always been a fascinating investment market for traders looking to make quick money. However, the increased market volatility makes it one of the most challenging markets to navigate. Notably, the market's volatility is not the only factor contributing to your success or failure; other elements like latency, low liquidity, and slippage issues also need your attention to stay on the right track. This article covers all about slippage. We'll also let you know how to minimize slippage issues and improve your trading performance.
Slippage refers to a situation when the price at which a position is opened or closed deviates from the trader's anticipated price. This phenomenon occurs more frequently with extreme volatility, economic events, or insufficient liquidity. The implications of slippage on a position might go either way, depending on the direction in which it occurs.
Slippage occurs due to various reasons. Below, we list some of them.
Significant economic releases or unforeseen geopolitical developments lead to rapid changes in the prices of underlying financial instruments. Because of this, slippage occurs, and orders get filled at prices other than anticipated.
Trade orders' execution time is critical in the forex market. Slippage is more likely to occur when order execution is slow, especially during high volatility.
Price slippage can also occur due to significant price swings triggered by major economic releases such as pronouncements from central banks or employment figures.
It can be challenging to locate buyers and sellers at specified price levels during less active trading hours or in specific currency pairs where the volume of trades is relatively low. Slippage may become even more severe as a result of this shortage of liquidity.
Even though it may not be possible to eradicate slippage completely, you can take many steps to reduce its negative impact on your positions. Let's quickly go through a few of them below.
Working with a broker with a solid reputation in the forex market is essential. Reputable brokers do not intervene with your trades and pass your orders directly to the market at lightning speed. If your broker offers an instant trade execution system, you will likely have fewer slippage issues.
To avoid slippage issues, you should wait to place market orders right before or during important economic events. Instead, you can use limit orders or wait for the market to settle before making trades.
Slippage is more likely to occur in less liquid markets, especially when trading substantial positions. Therefore, consider your risk appetite and market conditions to keep your trade sizes reasonable.
Remember, the forex market's liquidity and volatility are subject to change from session to session. Hence, traders can better schedule their trades to prevent slippage by keeping tabs on these shifts.
Slippage in the forex market is inevitable but can be reduced to an acceptable level with sound strategies. Traders can mitigate its effects by using limit orders, picking a reliable broker, avoiding major economic events, and exercising due diligence when trading currencies.
