The foreign currency market is a very volatile market where prices sometimes literally jump by several pips. These fast price movements often create a situation called forex slippage where orders are filled not on the price level the orders were originally set for but on the next best price level which often are several ticks away. It represents the difference in price between the level the order was actually executed and the price on which the order was originally set.
Forex slippage actually occurs only when you place two types of orders – market orders and protective stops. In foreign currency trading, slippage is a normal occurrence which traders have learned to live with. Market volatility is one of the realities of trading that the more experienced traders are able to cope with and this includes making allowances for slippage. Forex traders thrive on market volatility and they have learned to live with the fact that it is inherent with market volatility.
Slippage carries a negative connotation among many investors. Perhaps, it is because in the past, some unscrupulous brokers use it as means to milk their clients for more money. Since then, this negative connotation has stuck. In reality, forex slippage can either be a blessing or a curse to forex traders and it all depends on whether the price is moving rapidly for or against your position.
For example, if you have a buying position and the price is moving in your favor and you decide to get out and take your profits at say 50 pips away you’d put your trading stop there. But because of some breaking news, the price suddenly shoots up beyond your targeted price, your order gets filled on the next best price beyond your original target giving you an extra windfall profit from the sudden price jump. Definitely you’d consider forex slippage as a boon to your trading.
On the other hand if the price is moving against your position and you have set your protective stop about 30 pips away and suddenly because of some fundamentals recently announced the price makes a sudden dive going beyond your stop as a result the stop order gets executed at a much larger price than you originally hoped for. In this case, it is a curse to your trading.
Upstart traders are quick to blame anything and anyone for their trading losses including slippage. The more experienced traders on the other hand will take it in stride knowing that it is part of the risk they are taking. Slippage is seen by the more experienced as a lost opportunity to get out of the market with a lesser loss. However, to these veteran traders, a lost opportunity is never a loss and so they take slippage as one aspect of forex trading they cannot do anything about.
Forex slippage is never really a problem with veteran traders. They know that forex trading is not an exact science. And they have prepared well and made allowances to accommodate such eventualities in their trading plans.
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