Forex Slippage

Dangers, factors and solutions

You have to clearly understand, that there are not any «slight» factors on the currency market. Especially the scope of all the nuances (for sure if you will take them into account) allows you to potentially minimize losses and potentially maximize profits. One of the most popular mistakes when the newcomer starts to trade is to fumble the slippage factor.

Case Scenario

After determining the upstreaming trend on the chart of EUR/USD the trader decide to go “long” at 1.2195. But in fact, when the order opens, the price is already for 5-6 points higher than the desired one. That’s what actually the result of slippage is.

What is this slippage?

During the trading session traders make a huge number of deals. Even several points lost on each of them will lead a trader to a significantly worse off position. Thus, slippage direct influences the profitability of trading positions. Furthermore, a trader does not have any possibility to avoid this factor.

In the general meaning – slippage is the gap between the price at the time when order is executed and the price at the time when deal was opened by the trader. What are the reasons that cause such kind of gap? The point is that there must be a buyer / seller to buy / sell any asset. If not, the order opens in according to the latest quotes.

This most negative impact slippage provides on scalpers trade strategies & systems (short-term intraday trading has targets about maximum 20-30 points per deal). Scalpers already meet with losses from spreads, swaps, and various commissions.

Slippage only increase them and minimize the trader’s profit in short-term trading. At the same time, it does not provide such a significant negative effect within medium-and long-term trading.

 

Cases when slippage effect raises:

  • At the opening of the trade order;
  • At the closing of the trade order;
  • At the opening of the pending order, scheduled by the trader in advance;
  • At the closing of the pending order.

Slippage Factors

Slippage is affected by several factors: the volatility of the asset, the speed of order execution by the broker, the type of trader’s account, and the mechanics of order processing.

Volatility is a very important indicator. It determines the dynamics (including the speed) of price changing. Generally speaking, volatility depends on such market conditions like:

  • The financial health of the country whose currency is being traded​;
  • Investors market’s activity;
  • Mismatch of macroeconomic forecasts — when the value of the actual indicator differs from the previously predicted one.

Type of trader’s account is also important and affects slippage. We will define 3 main groups of account types:

Classic or Standard

The most popular account type is so-called “classic” or “standard” account. It has no strict limits of the deposit amount, has a high level of leverage and provide to traders a wide range of trading tools.

ECN Account

Used in interbank trades. It has smaller spreads and high order execution speed.

HDD or STP

HDD or STP accounts have different trader’s orders processing without intermediaries and with minimal commissions.

There are two methods of trader’s orders processing: Instant Execution and Market Execution. The first option totally excludes slippage. If there is no price selected by the trader when opening a position, it appears as a “Requote”.

When a second option is used, the order opens anyways, but if there is no price selected by the trader, the order is opened at the nearest quoted level.

In addition to the factors listed above, slippage is undoubtedly influenced by the quality of communication, the broker’s equipment, and, of course, its integrity. So, when starting Forex trading, you must carefully study all the pros and cons, read the reviews of traders and broker conditions provided.

In the general meaning – slippage is the gap between the price at the time when order is executed and the price at the time when deal was opened by the trader. What are the reasons that cause such kind of gap? The point is that there must be a buyer / seller to buy / sell any asset. If not, the order opens in according to the latest quotes.

How to minimize the slippage effect?

Adopting NeroEx Technology

Slippage is a mandatory part of the trading process. It is impossible to completely get rid of its influence. But it is possible to take into account and put in place some solutions that allow to minimize the impact of slippage.

If the factors that affect slippage are defined, trader can decide how to reduce possible losses. And for sure it depends on the trading strategy.

In medium-and long-term trading, the negative impact of slippage is not too significant. The price passes a large number of points, and the possible initial losses are negligible compared to the profit received. For traders using strategies on D1, slippage is not a problem at all.

Scalpers should study the conditions provided by brokers more carefully before they start trading and select the most suitable one. You should choose brokers with positive customer reviews and a long presence in the world of Forex​.

When opening an immediate execution order, the trader can set the maximum deviation from the requested price. If this condition is not met, the order will simply not be opened, thus preventing possible losses.

The technical aspect is very important in short-term (intraday) trading. Any scalper should remember that to use these techniques of trading, it is better to have high-speed internet connection, in order to avoid the negative impact of third-party delays during the trading process.

Abstaining from trading on news is also one of the ways to prevent losses from slippage. For example, when trading following the release of important economic and/or political news – the trader defines the best moment and takes a decision to proceed, immediately presses the button to open the position. However, in a fraction of a second, the price makes an unpredictable jump, and the order opens without any benefit. The average value of slippage within the news-based trading is about 10 points. The estimated average profit from such kind of operations when dealing with major currency pairs is about 30 points. Thus, slippage is expected to absorb about a third of the profit – we consider this as a significant loss.

A good solution to minimize delays when opening trading positions is to use pending orders. In particular, to Buy / Sell Limit orders, because they immediately send an order to the market with a much greater probability of its execution at the price specified by the trader.

Often settings of automated Advisors used for trading, have a slippage parameter. If the trader sets it as a certain numeric value, the order will open only if the price level will not exceed it. If the price offered by the broker differs from the price stated by the trading robot, taking into account the slippage parameter, the transaction will not take place.

And for sure you should consider to our exclusive solution – NeroEx. This is a complex technology, which includes all the methodologies listed above and many others. Sincerely saying, we spent years to develop a stable technical product that could reduce the negative influence of the slippage.

The most important thing you should consider – we succeeded in reducing the order processing time. Each client/trader can execute orders safely, without stressing of the negative effects of slippage. Thus, it allows for great possibilities to professional traders, always walking a tightrope. NeroEx is expected to be a useful tool for them which may optimize their trading experience.

NeroEx technology is available to each trader, coming to our platform. And we expect to get positive feedback from each of you after first impression.