What is slippage?
Slippage refers to a situation when an order of a trader is executed at a price that is different from the price desired. The execution price can be either higher or lower than the preferred price.
The difference between the requested execution price and the actual execution price is deemed slippage, regardless the direction of the price movement.
Slippage favouring a trader, is described as positive slippage, while an order filled at a less favourable price is called negative slippage.
Slippage is not to be confused with spread, which is the difference between the ask (sell) price and bid (buy) price applicable to any forex trade.
List of the 7 Major Currency Pairs for South Africans less Subjected to Slippage (2020)
1.🥇 EUR/USD
2.🥈 GBP/USD
3.🥉 USD/JPY
4. AUD/USD
5. USD/CHF
6. NZD/USD
7. USD/CAD
A Brief Explanation of the Major Currency Pairs in South Africa for Dummies (2020)
EUR/USD
The shortened term for the Euro against the US Dollar.
GBP/USD
The shortened term for the British pound sterling against the US Dollar.
USD/JPY
The shortened term for the US Dollar against the Japanese Yen.
AUD/USD
The shortened term for the Australian Dollar against the US Dollar.
USD/CHF
The shortened term for the US Dollar against the Swiss Franc.
NZD/USD
The shortened term for the New Zealand Dollar against the US Dollar.
USD/CAD
The shortened term for the US Dollar against the Canadian Dollar?
Why Does Slippage Occur in the Forex Market?
Slippage occurs in various financial markets, such as stocks, bonds, futures, and forex. However, slippage shows a tendency to occur in different circumstances and at different times in the diversified financial markets.
Slippage occurs during periods of high volatility (currency fluctuations), such as major news events or when important economic data is released. In this instance, forex traders will probably fill trades at the next best price unless there is a limit order in play.
Slippage can also happen when a currency pair is trading outside peak market hours.
Furthermore, spot prices (current market prices) can change quickly, allowing slippage during the delay that occurs between a trade being processed and when it is filled.
Slippage can also be caused by the imbalance of buyers and sellers. For every trader who wants to buy a currency at a certain price and specified quantity, there should be the same number of sellers, matching the specified price and trade size. If such a situation is not possible, an imbalance between buyers and sellers develops.
The imbalance causes prices to fluctuate (moving up or down), necessitating trade orders to be adjusted to the next available price. For example, a trader intends to buy EUR/USD at 1.1730, but there are not enough sellers willing to sell euros at 1.1730, prompting the trader to look for the next available price. Since there were no sellers at 1.1730, the trader’s order is executed at the next available price of 1.1735, resulting in a negative slippage of 5 pips.
Conversely, if there are many sellers willing to sell their euros, the same trader might find a seller who is prepared to sell euros at 5 pips cheaper (1.1725) than the trader’s requested price – a positive slippage of 5 pips for the trader.
The seven major currency pairs are less subjected to slippage since they are more liquid. The seven Majors, comprising 85% of the forex market, are: EUR/USD, GBP/USD, USD/JPY, AUD/USD, USD/CHF, NZD/USD, and USD/CAD.
Mitigating the Effects of Slippage
Although slippage may not be entirely avoided, it can be reduced by utilizing different strategies.
Avoid low-liquidity trading as far as possible
As mentioned, the major currency pairs have the highest liquidity. Conversely, rare currency pairs, also called exotic currency pairs, are traded less often, therefore, the liquidity is lower. An exotic currency pair includes a major currency alongside a currency of an emerging country, for example, USD/HUF – the US dollar and the Hungarian forint.
Further, trade with a broker who uses various liquidity providers. Make sure that your broker or brokerage deals with a variety of liquidity providers. Liquidity providers, such as central banks, commercial banks, and hedge funds, provide liquidity to the forex market by increasing transaction volumes.
Avoid periods of high volatility
Try to avoid opening positions during periods of high volatility. Periods of volatility usually enhance the chances for slippage as prices move at a quicker pace and at wider intervals.
Avoid trading around major news events
The possibilities are always great that highly volatile times can occur in the forex market around major news events, such as a trade war between two world powers like China and the USA.
Check the economic calendar for scheduled financial news events, such as the gross domestic product (GDP) of a country.
Use different types of orders instead of market orders
Market orders
A market order is an order by a trader, requesting a broker or brokerage to buy or sell a financial instrument, such as a currency, at the best currently available price in the market. The current market price is also known as the spot price.
A market order is the most basic type of order in trading, but also particularly susceptible to spillage.
Limit orders
Utilizing limit orders instead of market orders is a key strategy applied by forex traders to avoid or mitigate slippage. A limit order is an instruction to a broker to fill a trade at a price level that is more profitable than the current market price.
There are two types of limit orders:
- A buy limit order, also referred to as an entry order, opens a new position, specifying to buy a particular currency at the limit price or lower.
- A sell limit order, also known as a closing order, closes an existing position, stipulating to sell a specific currency at the limit price or higher.
A limit order can only be executed if the particular currency reaches the limit price – the price required by the trader. Different from a market order, a limit order will never be executed at a worse price for the trader, thus avoiding slippage.
Stop-limit orders
A stop-limit order comprises two prices: a limit price and a stop price. With a stop-limit order, after a specific stop price is reached, the order is changed to a limit order to buy or sell a particular currency.
Slippage warnings
Most of the trading platforms feature slippage warnings, preventing traders from placing accidental orders. Typically, a trader will receive a warning if he or she attempts to open a position that would execute more than 2% outside of the previous trade price.
How Much Slippage is Acceptable?
Slippage, also referred to as execution risk, is a basic part of forex trading. Most brokers and brokerages will notify traders in their terms and conditions that slippage is possible and that they, as brokers, are exempt from possible spillage losses.
There is no golden rule concerning how much slippage is acceptable. Therefore, a trader will need to determine how much risk and potential losses he or she is willing to incur when confronted with negative slippage.
Frequently Asked Questions
How do I stop forex slippage?
By using limit orders instead of market orders.
Does forex slippage occur when volatility in the market is high?
Forex slippage is more likely to occur then.
When does forex slippage occur?
In different circumstances and times in diversified financial markets.
Can imbalance of buyers and sellers cause slippage?
Yes.
Can the effects of forex slippage be mitigated?
Yes, by utilizing different strategies.
