Slippage is a term often heard in Forex trading and stock markets. It basically refers to the difference between the expected price of a trade and the actual price that is executed. This slippage usually occurs during times of volatility within markets and during constant fluctuation of stock prices.
Slippage in Forex occurs when there is a limit order or stop loss that presents itself at a rate which is worse than what was set in. For example, a new event or a volatility in the currency markets might make an order at an expected price difficult to be carried out. Hence, the traders will trade at the next best price rather than the expected price of the trade.
Suppose one wants to purchase EUR/USD at 1.3000 and order at that price, but it actually goes to a price of 1.3001. This means that there has been a slippage of say, 1 pip.
It is important to note because it happens to be one of the many factors forming the transaction costs of a particular trade. Along with spreads, commissions and swaps, slippage factors in the total transaction costs. The higher the slippage the worst off the trader is. Low slippage actually means that a trader has avoided losses and is good for forex trading.
High slippage affects the profit potential of a trade very negatively, almost destroying it. When brokers see the slippage going towards negative, they offer what is known as a price improvement. A price improvement is also positive slippage.
Brokers always look for low slippage during trading since it minimizes risks and losses. Due to fluctuations, chances are that a trade will always have sort of slippage, hence it is best for it to be as low as possible. For traders to make a trade with very low slippage, it is important that they look for brokers who have access to an advanced technical and management system.
Typically an ECN broker, one who is a part of an electronic communications network, will be able to have all trades processed by a computer and even broadcast the client’s orders straight to the market. This will ensure that the traders get all the real market’s quotes and prices.
The internet actually has some great places where slippage can be compared and performance can be tracked properly. Zulutrade.com for example, is listed as having very low slippage in the markets. Other than that, traders can also try to maintain low slippage by avoiding a trade during times when high impact news have just surfaced.
Traders can also attain low slippage by setting a market range and having some price improvements strategies in handy. Brokers are usually tasked with making a trade that has low slippage so the client can save up on money and expand their profit potential. Avoiding a trade during ‘dead’ hours can also help maintain a low slippage.