*OspreyFX would like to state that traders should research extensively before following any information given hereby. Please read our Risk Disclosure for more information.
The Slippage Effect: The Trader’s Guide
Trader’s Takeaways
- What is slippage?
- Why it Occurs
- Types of Slippage
- How to Avoid it
Let’s set the scene.
You are about to hit the hay and pull the curtain on yet another successful trading day. Following the steps of your Trading Plan, you open a position on AUS/USD overnight. The sun rises on what promises to be another great day, instead, you have woken up to what feels like a nightmare. Overnight a disastrous market event has caused AUS/USD price to plummet. Luckily, you are risk-averse and you set a stop loss just in case something did happen while you stepped away.
Taking a closer look, you notice something out of the ordinary. The difference between the value you have set as your stop-loss and the actual point where you exited the market was different, as a result, you lost more pips than you anticipated.
Your mind races, what could have happened? Breathe, you have just witnessed something known as slippage, this is common, particularly in times of volatility.
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What is Slippage?
Simply put, slippage refers to the difference between the expected price on a trade and the actual price executed by said trade. It is a small difference that might happen for a myriad of reasons but it normally has to deal with an increase in volatility.
Whenever global markets are highly volatile – or whenever a trader is executing a larger order that does not have the corresponding volume to be cashed out in the precise price they wanted to exit the market – some prices will “slip” to the best next position.
Slippage happens more often in markets that do not have larger volumes of trades, but no market, trader, or broker can completely avoid it.
Types and Examples of Slippage
There are two kinds of slippage: Gap and Partial.
If a trader sets up a stop-loss that does not occur in the live market – for instance, when prices fall too fast due to breaking news that affects the currency or commodity they currently have open trades – any reliable broker like OspreyFx will look for the liquidity provider which has the next best price, in order to minimize slippage.
Another common cause for the phenomenon is if a larger trade is set with an exit point that does not comport it. Suppose a trader has 200 lots in the AUS/USD with a specific stop-loss level that only have 100 lots available. In this case, the remaining lots will be allocated on the next best prices, creating a smaller slippage either positive or negative.
How to minimize Slippage in your trades
As it happens with any trade in a live market, slippage cannot be completely avoided. There are, however, tools and strategies to avoid it.
The safest bet is always to avoid opening trades during periods of higher volatility, as those are the moments where most slippage occurs. Another tool that helps is to have a proper understanding and study of common market trends, to be better equipped to deal with slippage beforehand and consider it part of your plan.
However, if you want to open positions on faster markets, OspreyFx assures the best liquidity providers for our traders, which minimizes the occurrence of slippage even in highly volatile markets.
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