Slippage in the Forex Market: Issues to Know and How to Control

In the world of currency trading, slippage is a phenomenon that every trader must face. If not understood deeply, it can unexpectedly eat into your profits. This article will help you understand the true meaning of slippage, its causes, and most importantly, how to effectively control and reduce its impact.

Understanding Slippage Before Trading

What exactly is slippage? Many people wonder about this question. In fact, slippage is the difference between the price you expect to buy or sell at and the actual market price. For example, you intend to buy at 1.3650, but in the blink of an eye, the price changes, and your order gets filled at 1.3640 or 1.3660 instead. That is slippage.

Slippage is categorized into three types:

Type 1 - No Slippage: When your order is confirmed at the exact price you requested, e.g., 1.3650.

Type 2 - Positive Slippage (in your favor): The price moves in a better direction. You intended to buy at 1.3650 but received 1.3640 (more favorable, i.e., lower by more than 10 pips).

Type 3 - Negative Slippage (against you): The price moves unfavorably. You intended to buy at 1.3650 but got filled at 1.3660 (more than 10 pips higher).

Additionally, there is the concept of “Requote,” which is often confused with slippage. The difference is that a requote occurs when the previous price is no longer available, and the system offers a new price for you to accept. Slippage happens automatically. Properly setting slippage parameters can help you avoid requotes immediately.

Is Slippage Really Dangerous?

Many traders blame slippage as a “lie” from brokers, but that’s not entirely true. When slippage occurs during trading, it indicates that the market is actively functioning. All ECN accounts experience slippage because your order connects to the interbank level (banks trading with each other). Therefore, it cannot be avoided.

However, slippage should not be viewed as a crisis; it is more normal than problematic. As long as you know how to manage it, you can even turn slippage into an advantage. Often, positive slippage exceeds your expectations.

7 Effective Ways to Reduce Slippage Impact

In reality, we cannot eliminate slippage entirely, but we can control and significantly reduce it.

1. Choose a Reputable and Trustworthy Broker

Slippage is a natural phenomenon, but if it occurs abnormally and frequently, it may indicate a poor broker. If you see slippage exceeding 10 times out of 100 trades or pip differences consistently higher than other brokers, consider switching.

Before opening an account, select a broker regulated by trusted authorities such as ASIC, FCA, CIMA, FSC. This ensures the company operates under high standards.

2. Maintain a Stable Internet Connection

The second priority is a reliable network connection. Use a wired connection instead of Wi-Fi, as it is much more stable. During trading, close programs that use the internet, like Skype or others that may reduce bandwidth.

Scalpers should pay extra attention to this, as even slight delays can cause losses.

3. Set Slippage Parameters in Your Trading Terminal

When opening a new order, set the “maximum slippage” or the maximum deviation from your requested price. If your order exceeds this limit, the system will not execute it. This helps you conserve capital and wait for better opportunities.

4. Use Pending Limit Orders Wisely

Pending orders include Stop and Limit orders. Limit orders allow you to enter the market at the best available price at that moment. They generally have better liquidity but tend to experience more slippage than stop orders, especially if your account is connected to the interbank level.

5. Switch to Higher Timeframes

Slippage is a serious issue for traders using 1-minute charts. Switching to daily or 4-hour charts significantly reduces the impact of slippage.

6. Avoid Trading During Major News Events

When political or economic news is released, the likelihood of slippage increases dramatically. A simple tip: avoid trading 30-40 minutes before major news releases and wait at least 30 minutes after.

7. Select News Based on Volatility

If you aim to trade during active market hours, study which news causes about 15 pips of slippage. If your average profit per trade is 45 pips, slippage can reduce your gains by 30%. Knowing which news causes large movements (around 25 pips) and which causes smaller changes (around 50 pips) is crucial.

By trading only during news with higher volatility, you can reduce your losses from 30% to about 17%.

Which Currencies Are Least Affected by Slippage?

Under normal market conditions, high-liquidity currency pairs like EUR/USD and USD/JPY tend to experience less slippage due to high trading volume and more stable prices.

However, during major announcements, even these highly liquid pairs can experience slippage.

Important Reminders

Slippage is one of the risk factors traders must accept and is a common phenomenon in financial markets. We cannot eliminate slippage, but we can minimize it by choosing trustworthy brokers, maintaining a good network connection, setting orders wisely, and timing your trades and currency pairs appropriately. You can turn slippage into a strategic part of your trading plan.