You may have heard about price slippage and it may have caused you to lose as well, but you do not know what slippage is. In fact, slippage is one of the most important terms that you should know when you start your journey in the Forex market and it is also considered one of the tools used by the market maker.
A Complete Guide to Forex Slippage
1 – What is Slippage
Slippage is when an order is executed at a certain price, but at the time of execution, the order is placed at a completely different price.
Price slippage is also a large movement in prices due to important news or at midnight. At the time of price slippage, you will notice that prices move by a large number of pips, and it will be difficult for the trader to enter a trade at this time because the speed of executing trades is difficult to keep up with such rapid price movements.
What is the cause of slippage?
There are many factors that may affect the market and thus may cause price slippage, including:
News
The occurrence of price slippages is very normal in the Forex market, especially during important news. You will not find price slippage at the end of the day or in the news, but the market reacts strongly to strong news such as interest rates, inflation, NFP, etc, This is because the market moves rapidly on this news and it is normal for price slippage to occur at these times.
Natural disaster
The reason for the price slippage may also be the occurrence of natural disasters because the market reacts to important events that occur in the world. If there is a natural disaster that affects the economy of a country, traders and investors head to safe havens and thus positions on the remaining currencies are closed.
Political events
There are political events that are somewhat different from the news that you will find in the economic calendar. This type of news may occur at unknown times or you may know the times, but you will not find it in the economic calendar.
Such as elections, international crises, sudden government decisions, or geopolitical tensions can greatly affect the financial markets, especially the Forex market because such events are related to the country’s affairs and it is natural that any event that occurs in the country has an impact on its decisions and plans will consequently affect its currency.
Midnight
At the end of the New York session, slippage may occur due to the low liquidity in the market during this time. This means that orders may be executed at prices different from the expected prices because the spread becomes higher than normal, leading to unexpected volatility.
Slow internet connection
Price slippage may occur if the internet connection is slow because there will be a long time between the execution of the order and the actual time of its execution by the broker.
Metatrader ping
To make sure that your internet speed is good, go to the platform and click on the internet ping on the bottom left of the platform and you will find the platform’s servers. If the speed is slow, you can choose the server that suits you and you will find that most of the speeds on the platform range between 60 and 100 ms.
2 – How Slippage Affects Forex Traders
The price slippage that occurs during news time differs from the price slippage that occurs at midnight depending on the strength of the event itself. For example, during strong news, the price slippage occurs very strongly and the market moves more than 50 points in one second.
price slippage
In this picture, you will find that the EUR/USD pair moved more than 70 pips in one hour as a result of the strong news that happened at the time, which was the speech of Federal Reserve Chairman “Jerome Powell”.
At such a time, if someone buys the EUR/USD, he will make big profits of course. On the contrary, if you decide to sell EUR/USD in this event, you will lose a lot of money and you may lose your entire account. Do not rely on stop loss at such times.
Because the stop loss is completely ignored at news time and as a result of this big movement that occurs at news, it is difficult for the price to respect the stop loss or even take profit and a price slippage will occur as a result of the momentum and liquidity that was pumped into the market.
If you want to close your trade at the time of the news, you must close it manually, and this is the best solution in this case because the take profit or stop loss They will be activated after some time, and in this case, you will not be guaranteed whether you will exit the market with profit or not., and despite closing the trade yourself, the speed of closing it will not be high. It is possible that if the market movement is still fast, there will be a delay in the speed of executing this order.
In this case, the trade will be closed at a price different from the price you wanted to close it at, The same applies to pending orders. Pending orders will not be activated at the same price you specified. Whether it is a Stop order or a Limit order, the matter is the same.
3 – Mitigating Slippage in Forex Trading
You can avoid price slippage in several ways, including:
Choose the right broker
Choosing a broker is very important because it plays a big role in price slippage.
If the broker is a market maker, then be certain that it is in this broker’s interest that you lose, and if you lose, he wins. So in this case, if the broker is a market maker and controls the market, what prevents him from moving the price by a large number of pips and making traders lose?
The market maker broker is a liquidity provider for the market and is one of the most important reasons for price slippages. He can exploit the amount of liquidity he pumps into the market to achieve a specific goal, which is the loss of traders. This may happen during news or any time he wants.
You will notice when news is released or at normal times when there is a violent movement in the market that the candle movement at the Market Maker broker is somewhat different from other brokers because he deliberately manipulated the prices in order to make the traders who trade with him lose.
Market makers vs ECN brokers
There are two types of brokers in Forex: either Market Maker, which we have explained its purpose and what it is capable of doing, or ECN, which is the preferred type for traders because these brokers cannot manipulate prices and only pass your trades to liquidity providers to execute them, What is meant by liquidity providers here is not the market maker, but the liquidity providers contracted with them, such as banks and large companies. Not all liquidity providers are market makers.
ECN brokers are not considered liquidity providers to the market, but they are only brokers that provide services to traders and do not have the authority to manipulate prices or pump liquidity into the market.
ECN accounts
ECN accounts will help you execute trades at high speed and this will protect you somewhat from price slippages. You will find ECN accounts with most brokers, even Market Maker provides ECN accounts, but the details of these accounts may differ from one broker to another.
For example, you may find a broker that sets a minimum deposit of $3,000 to open an ECN account, and the account details, including leverage and spread, differ from one broker to another, depending on the broker you will trade with. The broker may also add a commission in addition to the spread for this account.
Do not trade with strong News
If you want to avoid price slippages, you can stay out of the market during strong news because if you decide to enter a trade before or during strong news, you will expose yourself to price slippages.
But if you want to trade at such times so that you can seize the profits that you may achieve in such large movements, there are good strategies that you can follow so that you do not expose yourself to large losses and profit with the news.
Strategies to trade with the news and avoid slippage
You can place Buy Stop and Sell Stop orders above and below the current price five or two minutes before the news release, for example.
stop order
Such a strategy also carries some risks. It is possible that a price slippage will occur and the order will be activated at a price different from the specified price, but delaying the price execution by a few pips is not a big deal if the event is strong and you believe that it will move more pips in one direction.
Of course, if the price moves up and down, this will not be a suitable strategy for you because understanding the news before it happens and whether it will move in one direction or not, is very important in order to implement this strategy.
Anticipate the impact of the event
You can open a deal before the news is released, and thus the deal will be executed at the price you specify and before the violent movements that occur at the time of the news, but this decision may carry some risks.
If you are not sufficiently aware of the impact of the news and the expected result of the news, you will lose many points. The first method we mentioned previously, if the price goes against the deal, you will lose almost half of the movement that it made at the time of the news, but in this case you will lose all the points that it will move, and the opposite is also true. It is possible to achieve large profits in this case.
Entering at the time of the news carries with it great risks and profits as well, so such decisions are somewhat advanced for novice traders.
Leverage vs News
Most brokers reduce leverage before important news to protect their money from loss. In the event that the trader decides to enter a trade with all his money and loses it, the broker may also lose some of this money as a result of price slippage.
Because at the time of price slippage, as we agreed, the price does not respect the stop loss, take profit, or even the stop out, so you may lose more money than you have in the account, and this money is considered the money of the broker you are trading with, so the broker reduces the leverage, and thus he can reserve a larger part of the margin to ensure that he does not lose, and also that the trader does not lose his entire account.
Conclusion
Knowing slippage is very important to avoid it during news and political conflicts. If you have an open trade during high market momentum, a price slippage will likely occur to take profit and stop loss and the price will not respect any of these levels. Even if you try to close the trade manually, it may close at a different price than the one you want.
