What is Slippage in the Forex market?

What is FX slippage?

When trading Forex, there may be a slight difference between the expected price and the execution price (the price when the Forex trading is completed).

It is called slippage.

Slippage is a common experience as a forex trader, but it can work both favorably and disadvantageously.

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What causes the Slippage?

The main reason for slippage is due to market fluctuations and execution speed.

When the market volatility is high, this generally means that liquidity is low and market prices fluctuate very quickly.

When this happens, the liquidity provider will close the deal at the next highest price.

This affects Forex traders when there is not enough liquidity in the exchange to close the order at the ordered price.

Another cause of slippage is its execution speed.

An electronic communication network (ECN) is fast enough to complete a transaction at the desired price.

As a result, the execution time is even shorter as the market price changes in seconds, which makes a difference especially for large transactions.

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Example of Slippage in Forex

Let’s say the AUD / USD price was 0.9010.

Suppose you have analyzed the market and predicted that the market is on the uptrend, so you decide to buy one standard lot in the hope that it will be executed at the same price as the current AUD / USD 0.9050.

The market rose as expected, but in a matter of seconds it went up to 0.9060, exceeding your order price.

In that case, the market will not be able to offer your order price of 0.9050 and you will be trading at the next possible price.

As an example, suppose it runs at 0.9045.

In this case, you will get a positive slippage, 0.9050 – 0.9045 = 0.0005, or +5 pips.

On the other hand, suppose the transaction was executed at 0.9055.

After that, a negative slippage will occur.

0.9050 – 0.9055 = -0.0005, or -5 pips.

It is important to note that slippage can occur on all types of requested orders, including stop loss, take profit, buy / sell stop, and buy / sell limit orders.

Many brokers use market execution and cannot guarantee such orders.

Such brokers operate under market regulatory rules and are therefore unable to meet forex orders that no longer exist.

If the order price becomes unavailable, the order will be completed at the market rate of the Forex brokers’ liquidity provider.

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