Forex slippage and price improvement
Slippage is a phenomenon where prices may change as a trade is being placed; therefore, traders may enter or exit a trade at a price that is higher or lower than they wanted. This occasionally happens because of high volatility, unexpected market news, economic data and news releases, opening and closing hours. Whenever there is an imbalance of buyers, sellers, prices and trade volumes, prices will need to change and trade orders have to be adjusted to the next available price.
Slippage should be regarded as a positive indication that the trader is engaging with a fair and transparent market.
Traders can experience their orders filled in three possible ways:
- At the exact price quoted,
- Negative slippage – where the order is filled at a price not in their favour,
- Positive slippage or price improvement – when the order is filled at a better price than the price originally quoted.
Can slippage be avoided?
Slippage cannot be completely avoided, but it can be reduced. One way for traders to reduce the risk of experiencing slippage is to confirm that their brokerage works with a number of liquidity providers. Another way for traders to avoid slippage is to try to avoid trading during periods of high volatility. Volatile trading environments usually increase the chances for slippage as price moves at a faster pace and at wider intervals. FXB Trading works with a number of liquidity providers to ensure that our clients always receive the best market prices.
Slippage can be a positive phenomenon
Slippage is not always considered by traders to be a negative phenomenon. Occasionally, positive slippage or price improvement can occur in a trader’s favour and actually widen the amount of profit he could make on a trade. Therefore, that is why traders should carefully think about the amount of slippage they are willing to bear before entering a trade.
- A trader places an order to buy 1 lot of EUR/USD at the market price of 1.19005 but the order was executed at 1.19010. The trader has experienced negative slippage of -$5.
- A trader places an order to buy 1 lot of EUR/USD at the market price of 1.19005 but the order was executed at 1.19000.
- The trader has experienced a price improvement (positive slippage) of +$5 as the order has been filled at a better price than the initial order.