Given the shaky and uncertain situation in the financial market now, traders are reminded about the possibility of slippage occurrence when they are executing their trades.
First of all, what is slippage? Slippage is a situation where the price ordered is different compared to the execution price – a phenomenon when the final execution price does not meet the initial expected price.
Why so? It is because of the delay due to the market fluctuation in the fraction of the second when the trade is being ordered. The price offered initially has been adjusted to another, and since the trader has already executed the trade, the order will be filled with the next best price, no matter if it’s lower or higher than the expected.
Slippage is rather a common sight in trading but it mostly occurs when the market is experiencing high volatility, like news release or financial breakdown. Or another reason, trading in a thinly traded market. The biggest slippage often occurs around major news events. Even though the big moves in the market seem alluring but traders should keep in mind that getting in and out during this particular period when everyone’s trading may prove to be problematic. Therefore traders are advised to check the economic and earnings calendar to avoid trading several minutes before or after major announcements that are marked as high impact.
Despite the fact that the possibility of encountering slippage is significantly lower in our daily trading, traders should understand that slippage is not necessarily bad in trading. In fact, slippage can be beneficial to you.
To put this concept into a numerical example, let’s say Trader A attempts to buy the EUR/USD at the price of 1.3650.
The buy order is executed, and the best available price being offered suddenly changes to 1.3670 (20 pips above Trader A’s requested price), the order is then filled at the price of 1.3670.
The buy order is executed, and the best available price being offered suddenly changes to 1.3640 (10 pips below the requested price), the order is then filled at this lower price of 1.3640.
Above all, if you rarely trade during major news events, the occurrence of slippage will not be an issue throughout your trading. Utilize the stop-loss order so you would face a smaller risk when catastrophe hits and slippage occurs. And keep in mind that slippage does not necessarily denote a negative or positive movement, it can be a normal situation for traders when the market experiences higher volatility.