How is this possible?
This is for him slippage and in this post I am going to explain what it is about, let’s go for it.
- 1. What is slippage?
- 2. Why does this slippage occur?
- 3. How slippage affects Forex trading.
- 4. How to avoid slippage in Forex
- 5. Slippage in algorithmic trading
- 6. Things you should know about slippage in Forex
- 7. How do I deal with slipagge in my trading?
1. What is slippage?
The slip is the difference between the price that we place our order and the price at which our broker executes it.
If the price that has been made in the market, your order is worse than the one you placed, the displacement is negative. If the strike price is better than the lock price, then the slippage is positive.
An example (of course), to understand it better:
- You place a buy order on the GBP/USD pair at 1.3100 and the order is filled at 1.3106, this means that there is a negative slippage (against) of 6 pips.
- You place a buy order on the NZD/USD pair at 0.6700 and the order is filled at 0.6695, in this case the positive slippage of 5 pips.
2. Why does this slippage occur?
The famous slippage happens, above all, for these four reasons:
2.1. Speed of execution
The speed of execution of orders by our broker. If it is slow, it influences us badly.
As we have already commented in other articles, volatility is something that you have to keep in mind. Something like the bumps in the road when you take the car.
At times of low volatility, the market is calm, prices are stable, and the risk of slippage is low.
Opposite case. When volatility spikes, prices move quite fast and the probability of our order slipping is higher. For example, with the publication of news.
If the liquidity of a currency pair is high, it is because the number of buyers and sellers is also high.
For this reason, liquidity in exotic pairs is low, because there is less trading. In these cases, it is possible that you will not find a counterparty for your order at the fixed price and that there will be a displacement at the time it is executed.
2.4. order size
Although when you trade micro lots or mini lots you are less likely to experience slippage due to small order sizes, this changes when you trade larger positions.
You are more exposed to slippage, since there is not enough liquidity at that price to fully fill the order.
3. How slippage affects Forex trading.
This is all very well, but how can slippage impact your trading?
3.1. Execution of orders at different prices than desired
Slippage eats up parts of your profits or makes your expected losses larger.
3.2. Skip stop losses
As I said before, with the publication of important news (especially when the markets are closed), volatility rises. Therefore, indicated stop loss orders may not be filled at the marked price.
Result: a higher-than-expected loss.
3.3. Non-execution of the order
In our broker or strategy if you trade systems we can sometimes limit the maximum slippage we are willing to allow when placing an order. Of course, you must take into account that this limitation may prevent your order from being executed.
4. How to avoid slippage in Forex
One thing is clear, slippage is there, but let’s not get hung up on it.
Let’s put a solution. But can this be limited? Some of the things that are in your hand to minimize its impact:
- choose a broker that offers you a fast order execution speed and a good price.
- Uses a VPS or Virtual Private Server to execute your trading strategies. If you want to know which is the best VPS for Forex, here is the link to the post I wrote on the subject.
- Avoid operating in hours where the publication of Economic news important and at times of very low liquidity.
- Do not let pending orders to be executed while the markets are closed. If unexpected events occur, it is likely that when the market opens you will eat a gap.
5. Slippage in algorithmic trading
There is a misconception that by performing algorithmic trading we eliminate the risk of slippage as it is automatic. Fake.
When programming a strategy, you can define the maximum slippage that you are willing to take. You can also do tests to see how it affects.
As I told you before, it is likely that if you place a maximum slippage close to zero, many orders will not be executed. But if the maximum slippage is very high, the strategy can open trades at times of high volatility and with significant counter slippage.
To give you an idea, when you use platforms of copy trading that connect to external brokers, there is a delay in the signal between the servers of these platforms and the broker’s servers, so it is very possible that orders slippage often (hence the difference sometimes between results ).
It is common to see the copy trading signal provider sending the entry signal at one price and the broker executing it at another price. Especially if orders are sent at the market price in moments of volatility.
6. Things you should know about slippage in Forex
Here are some important things. Straight to the point:
- In Forex, slippage is measured in pips.
- In currencies there is a lower risk sliding because the market does not close every day (yes, there is less liquidity with rollover).
- Do not confuse the slippage or sliding with the spread.
- Although there is no maximum value of slippage that you have to allow, as a rule of thumb do not allow slippage greater than twice the spread value.
7. How do I deal with slipagge in my trading?
Although the slippage or sliding can even be positive at times, if there is something in your operation that you can not leave to chance, do it.
How do I do it?
I configure my trading systems so that they do not perform operations in low liquidity hours. Now, but… how do you know when the hours of least liquidity are?
Normally at the change of session and on Fridays after the publication of data in the United States. So what I do is I adjust my strategies so that one hour before and one hour after rollover (session change do not enter the market) do not operate. Nor on Friday afternoons, where the market is already dead.
If I do stress tests to see how a high slippage would affect the strategy that I am applying. If it affects you to the point that it is very unprofitable or losing, I remove it before applying it.
It seems silly, but this can save you from eating some good commissions on slips. Apply it!
How were you doing it?
Oh. And if there is something that has not been clear or is going around your head, I will read you in comments.