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What is slippage in Forex and how to avoid it?
What is slippage in Forex and how to avoid it?

After starting to trade in the financial market, each participant gradually realizes that every detail matters in this business. One that you are not paying attention to now can prove to be a decisive factor in 5 minutes. Therefore, every beginner should understand what slippage in Forex is and how to deal with it.

 

Getting to know the terminology

The term “slippage” is very common in both thematic literature and conversation of experienced financial market traders. It means the execution of the trade at a price different from that posted by the trader.

 

To calculate slippage, you need to find the difference between the expected and actual cost of executing the order. Based on the results of the calculation, it can be positive or negative (bring profit or loss).

As soon as there is significant volatility in the market, slippage occurs.

To better understand what slippage in Forex is we recommend considering the following example:

You open a position by placing a stop loss of $50 (if the loss reaches this amount, the trade will close automatically). The market went against you, and at the time of the automatic closing of the trade the amplitude of fluctuations increased significantly. Therefore, slippage occurred and the trade was closed with a loss of not 50, but 51 dollars.

What are the factors affecting slippage?

The financial market is extremely volatile and the situation can change every moment. That is why it is so important to understand what slippage in Forex is, as well as develop skills in predicting the outcome of trades.

 

So, only a few determining factors can cause the high volatility of the market, and corresponding slippage:

 

  1. Releasing important political or economic news. To somehow protect yourself in advance of some important events, be sure to study the economic calendar. Then, if you are not sure about the market response to a particular event, you can simply skip the day of trading, protecting your funds.
  2. Price gaps. There are a lot of reasons why they appear. At the same time, it is almost impossible to find reliable information on the issue, so it is unlikely that anyone will be able to reliably predict gaps.
  3. For no apparent reason. Forex is unpredictable. The absence of any events does not guarantee that the market will stay as calm as it gets. For example, one of the big players may decide to sell all of their assets all of a sudden. This decision is difficult to predict, but the volatility will be high because of it.

 

How to protect yourself from losses?

After learning what slippage in Forex is, many beginners get frightened of it and start feverishly looking for brokers who offer trading without slippage. But you should know that such promises are not true. Brokers are stretching the truth because slippage is difficult to avoid or predict. All you can do is try to reduce your losses.

The reality is that slippage does the most harm to those who scalp the market. When it occurs, the trader's losses will increase, while the profits will be minimized. If you are a medium-term or long-term trader, slippage will be almost imperceptible to you.

 To protect yourself from losses, you need to follow a few rules as a trader:

 

  1. Close positions on time and do not leave them open when important news is released. Check the economic calendar regularly and adjust your trading accordingly.
  2. Consider the annual extreme points. Of course, trading at this period is profitable and tempting. However, to succeed, you need to use an effective strategy and adjust it for expected volatility.
  3. Close your positions before the weekend. Usually, gaps occur exactly at the moment of market opening. Therefore, if you hold the trade over the weekend, the probability of it being a losing one increases significantly.

 

Having figured out what slippage in Forex is you will understand that it is impossible to completely get rid of this phenomenon. However, what you can do is to learn how to minimize your losses when it occurs. Use common sense and watch the market! This is the only way to succeed!

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