Slippage in Forex costs traders money.
Slippage is one of those nasty things that happens from time to time in the currency market (also known as Forex, which stands for foreign exchange). Knowing when to trade and being familiar with other aspects of the currency market can help you avoid slippage.
Slippage Defined
Slippage is the difference between the price expected and the price received. For example, if you went to buy euros with U.S. dollars (EUR/USD) at 1.2600 euros per U.S. dollar but actually received the price of 1.2602, that is slippage.
Slippage Happens in Forex
Slippage does happen in Forex, but not as much as in other markets. It is often the result of broker or trader actions.
How Slippage Happens
One cause of slippage is execution time of the software being used. When a trader hits the execute button on the software, there’s a slight delay between that moment and the actual execution of the command. Volatility is a more likely cause of slippage; if the currency pair is trading at a faster pace when a trade is being executed, the probability of slippage is much higher.
Reducing Slippage
Traders can reduce slippage in Forex by not trading during times of high volatility--such as when high-impact news has just been released. Many economic calendars around the Internet show release times for news and reports so traders can time their actions.
Additional Way to Reduce Slippage
Another way traders reduce slippage is to avoid using market orders, in which a trader just accepts the best price available. By specifying the price, a trader decreases the probability of slippage. She also mitigates software delay issues, because the trader buys at a set price versus what she currently sees on her computer.
