Slippage Meaning in Forex Trading
All active methods (scalping, PIP, sometimes day trading) often involve taking several points from each order. There are more than 5-8 such transactions during one trading session. Every single item in them is incredibly important. But there are moments in Forex when the execution of the order is carried out with a delay, and the price in these seconds is already 1, 2, or 4 steps. The trader performs everything correctly; however, such a loss of points maximizes the risk of loss of individual transactions and significantly reduces the effectiveness of trading. This situation is called by experts slippage in Forex. Any speculator should know and always consider the possibility of this phenomenon.
When trading on any financial platforms, the trader faces a certain risk of meeting with slippages. Yes, the negative version of Slippage is more common; however, it is worth remembering the cases of the passage of the quote in a favorable direction. Thus, only two categories of Slippage can be considered – positive and negative.
Exchange players on Forex can meet with slippage in trading in such situations:
- market transaction when an entry is done manually;
- exit at the market price, produced by the trader;
- on limit orders-sell-limit order or buy-limit order;
- using the trailing-stop option (dynamic stop-loss;
- on stop orders-sell-stop order or buy-stop order;
- when stop-loss is triggered;
- when the take-profit order is activated.
You can see the absolute possibility of the occurrence of slippage on all order types or orders in the Forex market.
How to minimize the losses
Knowing the factors that affect Slippage, you can determine ways to reduce possible losses. They largely depend on the way of trading.
In medium-and long-term trading, the negative impact of Slippage is almost invisible, since the price passes a large number of points, and the possible initial losses are negligible compared to the profit received. For adherents of trading strategies on D1 Slippage is not a problem at all.
Fans of scalping before trading should more carefully examine the conditions provided by dealing centers, and choose the most suitable. It would help if you chose brokers with positive customer reviews and a long period of work on Forex.
When an immediate execution order is opened, the investor can adjust the maximum deviation from the requested price. If this condition is not met, the position will not open, preventing possible losses of the scalper.
The technical component is important in short-term trading. Any scalper should remember that with this method of trading, it is better to use a wired Internet connection than Wi-Fi to eliminate the negative impact of third-party applications on the trading process.
To refrain from trading on the news is also one of the ways to prevent losses
Very often, when trading with the release of the most important economic and political news, seeing an acceptable price to buy / sell, the investor immediately presses the button to open the corresponding position. However, in a fraction of a second, the price can make an unpredictable jump, and the transaction will open without any benefit to the investor. The average Slippage on the news is about 10 points. The estimated average profit from news trading of major currency pairs is 30 points. It follows that slippage absorbs about a third of the profits, and this is a tangible loss.