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How to Fight Slippage

6:46 PM Feb 26, 2020
13605
Forex trading

Slippage happened to all of us. No matter whether you trade currencies or stocks, commodities or crypto, slippage exists in these markets. Slippage is a common situation in crypto, as it is one of the most volatile markets, but it's also typical in Forex. That's why you have to know how to deal with slippage.

So how can I fight slippage in Forex? The answer is simple - there is no way. You can’t completely get rid of slippage. However, you can learn to coexist with it. Let's take a look at what slippage is, where it comes from, and how to reduce the chance of its appearing.

What is Slippage?

If you happen to make a request at one price and notice that the order opened with a different quote, then you have already experienced our problem. This difference in a couple of points is slippage.

The most interesting thing is that slippage is not always a bad thing. Sometimes a trade is opened with a difference of a couple of points in your favor and it brings you additional profit. But often you lose these very few pips.

However, do not confuse slippage with requote:

  • A requote appears when your order was not executed at the price you need and there this price is no longer available in the market. In this case, you are offered a new quote for your trade.
  • With slippage, your request is automatically executed at the price that is a few pips different from the one you’ve set.

Where Slippage Comes From

Slippage occurs due to the specifics of market execution. When you make a request, your order gets in a queue. By the time your turn comes, the available volume may simply not be enough for you.

Let's look at an example:

  • 0.9875 - 15 lots available
  • 0.9874 - 40 lots available
  • 0.9873 - 100 lots available
  • 0.9872 - 75 lots available
  • 0.9871 - 50 lots available

Let's say you want to enter the market at 0.9871. There are 50 lots available with this price on the market. Unfortunately, the whole volume was bought by traders who managed to make an order before you. In this case, your order is executed at the next available price of 0.9872. It may happen that these 75 lots also end before your order is executed. Then your order may shift further by a couple of points.

A limited amount of available trading volume is associated with liquidity. If the top liquidity layer is not enough to execute your order the request is sent to the liquidity provider. If your order is too large then it can be divided into several parts and sent to several suppliers at once. There are several options in this case:

  1. Your request will be executed at an average price from several liquidity providers.
  2. If one bank refuses to fulfill the request and sends it to the next one it causes a delay in execution. Because of this delay, there might not be your price in the market available anymore.

Slippage happens not only during regular order execution but also when your pending orders and Stop Loss and Take Profit levels are triggered.

How to Reduce the Chance of Slippage

There is a solution for each individual situation. It depends on the cause of the slippage. If you find out why a slippage occurs in your case then you can reduce the chances of its occurring.

Technical Issues

The market moves at a tremendous speed. Delays in signal in just a couple of seconds might cause the price you need to be simply unavailable anymore. Often such delays occur due to problems with the connection of your trading terminal to the trading server or due to a poor Internet signal.

If you trade from a computer try to use a wired Internet rather than Wi-Fi. The signal speed will be higher. Try to provide yourself at home with the highest quality connection that works without delays or interruptions. If you trade from your phone, make sure you are connected to a high-quality Wi-Fi source or use high-speed mobile Internet.

Turning off all programs that use Internet traffic might also increase the chances of faster order execution. This includes any instant messengers, social networks, downloading files, or watching videos online.

Use Higher Timeframes

Scalpers that use minimal timeframes, such as M5, most often encounter slippage. For them, a jump of 1-2 points can play a huge role. If you trade on the daily chart, such leaps will be almost invisible to you.

Change the Account Type

I think this point should be used as a last resort. Since slippage occurs due to the specifics of the market execution, you can change the Interbank account to Standard, for example. However, I don’t advise you to change your entire trading routine due to rare cases of slippage.

Avoid Trading During Major News Releases

Due to the unpredictability of market behavior during the important news releases many large Forex players, such as banks, try to protect themselves from huge losses and exit the market. Often, these players are liquidity providers. With their leave, the liquidity level decreases markedly. It causes the situation with the lack of free lots described above and the number of slippages increases.

You will not be able to influence the situation. If you don’t trade directly on the news, then leave the market 30 minutes before the release of an important event and come 60 minutes after.

Use Limit Orders

If you use pending orders in trading, then it is worth giving preference to the Limit orders rather than Stop ones. Stop orders are triggered only when the market reaches the price you need. The price for your limit order is sent to the server right away and a part of liquidity is sort of “reserved” for you. This increases the chances that the pending order will be executed exactly with the quote you need.

Think About Slippage Tolerance

Slippage tolerance is the maximum percentage of slippage you can accept. Various brokers often integrate this function to prevent losses from significant price changes while you place orders.

Check Your Broker's Attitude to Slippage

You can clarify it in a couple of ways.

  • Backtesting your trading strategy will help to understand how much slippage your strategy would have experienced under different market conditions.
  • Some Forex brokers share slippage reports so their clients understand the average amount. You can use it to compare various brokers and choose the best fit for you.
  • You can choose a demo account to compare the execution prices to your expected prices. It is also an excellent solution to check the broker's honesty. Compare live account slippage with demo account slippage to see if there are any differences.
  • Contact your broker. You can always contact your Forex broker about their slippage policy. Many brokers try to reduce slippage or offer a slippage protection policy to be more competitive. Use it to find the best broker that will reduce the negative influence of slippage on your deposit.

To Summarize

Do not treat slippage as something bad. This is the first sign that your broker’s trading is real and your order is actually being displayed on the interbank market. Do not fight with slippage, don’t fall into despair, and don’t try to change the broker right away. Use the tips in this article to reduce your chance of slippage and keep making money.

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