Slippage occurs frequently in forex trading; most traders tend to misunderstand the concept.
When a trader fully understands how forex slippage works, it helps the trader to curb negative slippage and at the same time taking full advantage of positive slippage.
This article is centered on understanding how Slippage works in forex and how negative slippage can be avoided.
WHAT IS SLIPPAGE？
Slippage is a situation where a trade order is executed at a different ask/bid price. This occurs frequently when the market is in a high state of volatility.
Most traders consider Slippage in a negative light, but this could pan out to be a good thing for traders.
For example, if a trader decides to purchase EUR/USD at the present market rate of 1.1756. When the order is executed, there are three probable outcomes:
It is a process where the bid price for EUR/USD provided by a forex broker for example WikiFx is stated as 1.1756, and an order is placed and executed at the same bid price.
This happens when the buy price of an asset initially offered at 1.1756 changes to 1.1760 which means the asset is being bought at 4 pips worse than the initial buy price.
The process of executing a trade when the buy price of the trade abruptly changes from 1.1756 to 1.1750, that is 6 pips above the requested price.
Whenever a trade is placed at a price different from what was initially requested on a forex broker interface, it is referred to as slippage.
The screenshot below shows an example of a forex slippage
CAUSES OF SLIPPAGE AND HOW TO AVOID IT.
Slippage occurs when a trade order fails to be executed at the bid price. This event occurs when there is an imbalance in the market sector. The forex market is made up of buyers and sellers, now when there are more buyers than sellers willing to buy a particular asset, the price of the asset automatically moves up thereby causing a negative slippage. But when there are more sellers than buyers for a particular trade, the price of the trade automatically reduces thereby causing a positive slippage.
This entail that as a forex trader, if you plan to buy 100 thousand worth of EUR/USD at 1.1756, but when there is a shortage of sellers of EUR/USD at 1.1756, you'll have to place the trade at the next available price(s), therefore buying it at a higher price, and causing a negative slippage.
In a case where there is an influx of sellers willing to sell their Euros during the time an order is placed, the possibility of finding a seller willing to sell the Euro at a lower price is very high, thereby causing a positive slippage.
HOW TO AVOID SLIPPAGE USING WIKIFX
Wikifx is a platform that provides traders with legitimate and well-regulated brokers. By using this platform, it helps a trader pick out the best brokers that suit their trading style or pattern, thereby avoiding scam forex brokers.
Using Wikifx helps you pick the best-regulated forex broker for your forex trading; it comes with a lot of benefits and one of those benefits includes easy access to well-regulated and authentic forex brokers that will provide you with guaranteed Limit orders and Instant execution with a maximum deviation of 0 pips. These limit orders specify the precise price at which the trader wants to place the trade, therefore, preventing slippage. These regulated brokers also provide an instant execution with a maximum deviation of 0-1 pip, thereby bringing the slippage to a bare minimum. In this case, the forex broker takes responsibility for any loss that occurs due to slippage.
NOTE: Scam forex brokers do not provide guaranteed limit orders, thereby causing slippage.
CURRENCY PAIRS THAT ARE LEAST SUSCEPTIBLE TO SLIPPAGE
When the forex market is under normal market conditions, that is when the market is not volatile. Highly liquid currency pairs such as EUR/USD and USD/JPY are prone to less slippage. But when the market is in a volatile condition these liquid currency pair can be susceptible to slippage.