What is Slippage? (Slippage in Forex)
There are many dynamics, movements, and fluctuations in the Forex market due to the widespread and high volume of trades. Sometimes these movements and volatility are done for a short period. In these circumstances, trades may not accurately activate in the desired number, and this occurrence is called Slippage. Further, we will introduce slippage, the reason for its presence in Forex, and the timing of its occurrence.
Slippage in Forex
The price slip that occurs in the Forex market trades is called slippage. Simply put, slippage occurs when trades do not activate in the accurate number the trader has opened a position in, for reasons such as high fluctuations and a market gap.
For example, a trader analyzes the gold price chart (XAUUSD) and observes that the gold price is fluctuating. When the trader executes a purchase (Buy), the price is at $1825.30, but his trade has activated in 1825.80 with 50 cents difference and higher due to a high instant fluctuation in the gold symbol, this occurrence is called Slippage.
In what kind of trades does slippage occur?
Slippage may occur in manual trading, conditional trading, and the profit and loss limit, which we will review in each.
Slippage in manual trading (Market Execution)
Manual trading may not activate in places where the trader has traded when the trading speed is very high and made with a buy and sell dispute. For example, a trader has intended to sell the EURUSD currency pair in the 1.12345 number, and as soon as he executes the sell trade, it is activated with 2 pip slippage at 1.12325 due to the high fluctuation in the market.
It is noteworthy that manual trading in Trando is made without trade slippage due to the high speed in executing trades, even during high fluctuations.
Slippage in conditional trading or pending order
Transactions that the traders do not enter manually and adjust to activate on the condition of reaching the desired number are called conditional trades. Conditional trading is divided into two types of stops, such as BUY STOP and SELL STOP, and Limits, such as SELL LIMIT and BUY LIMIT. Learn about Pending orders in the Types of orders article.
As mentioned, Conditional trading or Pending orders activate when the price reaches the desired number, therefore, there is a time gap between the price reaching the conditional trading and activating. If the price fluctuation is severe during this period, it may cause slippage. For example, a trader opens his conditional trade of the Gold Symbol (XAUUSD) in the Buy Stop type at $1820, where the price of gold is traded at 1818 in the adjustment moment, and the price begins to ascend sharply and suddenly, reaching the 1820 number swiftly. When conditional trading is activated, the buy transaction may activate due to high fluctuations and sudden ascension to 1821. Note that due to high fluctuations, the price might have high movements instantly and in less than a second, which is why conditional trading may also activate with slippage in high fluctuations.
Slippage for profit and loss limits
At the profit or loss limits, like conditional trading, there is a time interval between the price reaching the profit or loss limit and activating. For example, a trader opens a 0.1 Lot gold buy transaction at 1810, in which the profit limit is at 1820. If the price reaches that profit limit, his trade will be closed at $100 profit, in case the price's sharp rise reaches 1820 and the profit limit activates in 1822, his transaction will close at $200 profit.
When does slippage occur more?
Slippage often occurs due to the high volume of trades or news events that cause severe fluctuations in the price of symbols. Also, slippage may occur, and there may be abnormal fluctuations in sessions where the trading volume is low.
Further, we will review the time when slippage might occur in trades.
Important news and events release time
At the time of important news releases, such as interest rates and employment reports, because of the news importance, the volume of trades increases, and the price fluctuations increase in an instant, so the likelihood of slippage in trading increases. For example, at 01:30 pm on Friday, the US Employment Report will be released, and the dollar-related symbols will make rapid fluctuations at the time of release. As a result, the USDJPY may move tens of pips in less than one second, so current and conditional trades will not activate at their exact points, and slippage will occur. Note that traders must specify the timing of important news in the economic calendar.
We recommend reading the "What is the Economic calendar?" article to learn more about it.
Forex weekend gap slippage:
Global financial markets, such as Ferox (except Cryptocurrency), are closed on Saturday and Sunday. Sometimes during these two days, something might happen which causes the Forex market symbols to open with a price gap when the market starts its activity on Monday. This price gap can cause slippage in conditional trading and profit and loss limits. For example, a trader has opened a trade of Buy limit type in the gold symbol at $1810, and the gold price is closed on Friday at 1812, the gold symbol will open on Monday in the $1805 number with a price gap. In this case, the trader's buy order, which was at $1810, will be activated with a $5 slippage at the gold symbol's starting point, which was 1805.
We recommend that traders read the types of financial markets and their working hours.
Slippage in rapid price fluctuations:
In addition to fundamental reasons that can cause instant high fluctuations, there are technical reasons that can also cause rapid price fluctuations, when the price reaches significant technical areas, it can cause severe price fluctuations. For example, weekly support or resistance levels, or long-term trend lines are one of the most important technical areas that can cause severe price fluctuations for slippage.
Is slippage only to the detriment of traders?
Although many people think slippage is only to the detriment of traders, it is not, and slippage can be both profitable and to the detriment of traders and is divided into three types.
Positive Slippage:
When the trade is opened or closed in the trader's favor, it is a positive slippage. Positive slippage often occurs in pending orders, such as Buy Limit and Sell Limit, as well as at the profit limits, because slippage often happens in the direction of price continuation, it is beneficial to the trader.
For example, The user sells the gold trade at 1826.5 in the current price, and because of slippage, the sell happens at 1828, so it is done at the higher point and is beneficial to the user.
Example: a user placed a gold trade of the Buy Limit type at $1810, and the price passes in a severe and sudden fall to 1810, and the user's buy order activates in 1807, which is in the user's favor.
Example: a user made a 0.1 Lot gold Buy order at 1810, and the profit limit is at 1820, the price passed sharply from 1820, and the profit limit activates at 1822, and his trade will have a profit of $130 instead of $100.
Negative Slippage:
When the trade is opened or closed at the trader's disadvantage, it is called negative slippage. Negative slippage often occurs in pending orders of Stop types, such as BUY STOP and SELL STOP, as well as in loss limits (stop loss) because slippage often happens in the direction of price continuation, which is to the detriment of the user.
Example: a user placed a gold trade of SELL STOP type at $1810, and the price passes 1810 in a severe and sudden fall, and the user's sell order activates at 1807, which is to the detriment of the user.
Example: a user made a 0.1 Lot gold sell trade at 1810 and placed its loss limit at 1820, the price passed 1820 sharply, and the loss limit activates at 1822, and his trade would have a $130 loss instead of $100.
Neutral Slippage:
If there is no price change in a trade opening or closing process, slippage is zero or neutral.