Part of any decent foreign exchange market trading education and training is getting the grasp of the concept forex slippage. Slippage is a common term used to refer to the gap or disparity of the market price during the time that you have made the order and the price when the order actually came to fill in the need. In foreign exchange trading, this is a common and recurring problem that is actually considered as a reality. Constantly, as a trader, you should assess your methodologies and ask yourself if you are doing enough.
It is a fact that the foreign exchange market is a market with a high level of fluidity. With this, any trader can note that if you are with forex, you will always encounter forex slippage. Other types of markets are not facing the same level of risk. In order to fully understand this, you should look into a market wherein no option, no stock, or no future has a definite price set. In such kinds of markets, there are two prices that are rapidly changing with time – the ask price and the bid price.
The ask price is the seller’s dictated price or assigned price for a certain product, service or commodity. On the other hand, the bid is the buyer’s version of the price or the amount he or she is willing to spend on a certain product or service. In the market setting, any trader is very happy to entertain an eager buyer. In general, a greedy trader will always want to get the most of any investment. He or she is very afraid that if there is a prevailing bullish trend, it might overtake the market. On the other hand, traders who do not wish to do some waiting will most likely sell his or her stock right away for as long as the deal will break even.
Given such scenarios, one can safely say that the forex slippage has a high degree of affinity to the state of the emotion of the market in general. Yes, the forex market psychology has a big part in the process. Sad to say, there exists no definite way of playing against slippage because it is highly dynamic and irrational by nature. According to studies, of all the traders in the world, those who are in the world of foreign exchange are the most emotional. This results into the frequent occurrence of forex slippage.
There are different kinds of slippages and they range from very minute or insignificant gaps up to the most drastic and earth shaking price differences that may cost a trader his or her fortune. The most pressing question here now is if there exists a way to hedge forex slippage. The sad answer is no, there are no established ways to be hedging against its occurrence. But it helps a lot if you will study the patterns and the usual dynamics of the market. This way, you will not be caught off guard. The best defense is actually sensing it way before it actually comes.