Blog Image

What is Slippage? Slippage in Forex Explained

Have you encountered a situation when you placed a trade and got an entry price different from the one you intended?

That’s what we call slippage in forex. It is one of those terminologies which, as a trader you must grasp, so you don’t have to guess what’s wrong with your entry point.

In this guide, we’ll explain what slippage is all about, the causes, and how to avoid it.

Forex slippage explained in 300 words

Slippage in forex appears when an order is filled at a price different from your intended one. It is calculated as the difference between the expected and filled prices.

What happens is when you place an order with the broker, you want to place at an exact entry point, but slippage comes and snatches a few pips from you. It’s because the bid/ask spread gets wider between when you place an order and when it gets executed, resulting in a price difference.

Forex slippage explained

Forex slippage explained

You might be wondering what causes slippage. It occurs during high volatility, like the central bank announcements, or when there is low liquidity (there are fewer participants to take on the other side of the trade). We’ll hone in more on this in a while.

Fun fact: Many major forex pairs like GBP/USD, EUR/USD, and USD/JPY often face less or no slippage. This is because they are more liquid, and you get the best price.

But to get the best price, you must have tighter spreads. Dominion Markets ECN and ECN Pro accounts offer spreads starting from 0 pips. So, trading major pairs along with 0 spreads makes a perfect combo.

Types of slippage

There are two types of slippage that can work in favor or against you.

Positive slippage

A positive slippage occurs when you get a favorable price difference. For instance, your order gets executed lower in a long position.

Negative slippage

It appears when a price difference moves against you. For example, getting a higher entry point in a short position.

Forex slippage example

On the USD/NOK chart above, we placed a short position, but the order was executed at a lower price, resulting in negative slippage.

Negative slippage example

Negative slippage example

What are the causes of slippage in forex?

We touched on some reasons for forex slippage, but let’s explain more of them in detail.

Low liquidity

You know the market consists of buyers and sellers, and there is a seller for every buyer and vice versa. Low liquidity appears when there are fewer buyers than sellers for a forex pair. And that’s one of the main reasons slippage happens.

For instance, you placed a short EUR/CZK trade at 25.20. However, there aren’t enough buyers for the pair. So, the broker executed your order at 25.25 when the buyers and sellers matched.

Volatility

It means price fluctuations in a given time. When there’s high volatility, the price moves quickly. During major news announcements like interest rate decisions or NFP, price moves rapidly, and the broker executes your orders at a different price, resulting in a slippage.

Price gaps

When a major news announcement or the market opens after the weekend, price gaps appear, and they cause slippage.

For example, you placed a trade on Friday, and it was executed on Monday due to the price gap.

Price gaps explained

Price gaps explained

How to avoid slippage in forex?

Not getting your desired entry point can be a bit frustrating, however, there are some steps you can take to avoid slippage in forex.

Placing guaranteed stop-loss orders

Stop-loss is good, but a guaranteed stop-loss is even better. With the GSL order, your trade will be closed at the exact same level you set.

The normal stop-loss may face slippage risks, and your orders can be stopped before time. However, with the guaranteed stop-loss, you take a hands-off approach, and your orders get stopped at the exact same level.

Suppose you place a short USD/PLN trade at 4.10 and set a GSL at 4.15. You'll get stopped if the price goes against you and hits 4.15.

Setting limit orders

There are two types of forex orders; market and pending. In the pending category, we have limit orders. You place limit orders at a price favorable than the current price. For instance, you set a buy limit order at a price lower than the current one.

This is a great way to prevent slippage, as your order will get executed at a specific level. If your order doesn’t get executed, it means your broker can’t execute the order.

Dominion Markets executes limit orders at the exact same price you specified. You can learn more about it on the accounts page.

Trading with fast-execution brokers

When you select a broker, you must ensure that the broker executes orders immediately. We know this delay can cause slippage, and we can’t stress enough that it can increase your overall trading costs. So, the broker must execute orders as soon as you place them.

With the lowest latency speed, Dominion Markets fills your orders at your specified price. So, you can trade without any slippage.

Setting slippage tolerance

Slippage tolerance is the price you are comfortable with if the slippage appears. When you set a slippage tolerance, you accept a certain risk you are willing to take if you don’t get the desired price.

If slippage occurs and you haven't set a tolerance, your broker will execute an order at the next available price.

Don’t trade on unexpected hours

Here’s a pro tip: You can place your orders at non-traditional hours, like in the early hours of the Australian/Japanese session or the late New York session. This time has low volatility, so your orders will get executed without slippage.

Final thoughts

Slippage is an important concept in forex, and you must come prepared to avoid it. Sometimes it can go in your favor, but it can often go against you.

So, understand the concept and avoid slippage by using the methods we mentioned above.

If you want to trade without slippage and low trading costs, Dominion Markets can be your best bet, as we offer some high latency, executing trades at your specified levels. Plus, you can get started with a minimum deposit of $100.