The financial market is very dynamic — prices change hundreds of times per second. The principles of trading in a store, when the buyer and seller make a deal at the price indicated on the price tag, do not apply to it.

On Forex, income is received from the difference between the purchase price and the sale price. Due to these features, orders are executed not at the exact price, but at the closest one. It may be better or worse than the indicated one. This is where the term "slippage" appeared in the lexicon of traders.

What is slippage

Slippage is the execution of an order at a price that differs from the stated one for the worse.

Initially, this was the name for the execution of pending orders, which by definition cannot be opened strictly at the specified price. Their peculiarity is that when the price reaches the desired level, the terminal looks for a better quote, so a deviation in one direction or another is permissible.

Now, with the sharp increase in volatility, slippage in the forex currency market is observed not only when opening, but also when closing transactions. There are good reasons for this, which will be discussed below.

Slippage can be from one to several dozen points. A trader is ready to put up with a difference of several points, but not with a significant discrepancy.

Features of limit order execution
When a trader places a limit order with deferred execution, he should be ready for execution at a price with significant slippage, since this is the essence of such an order.

Such orders request the conclusion of a deal at a price better than the current one. Let's say a market participant expects an uptrend to change to a downtrend soon and places an order above the existing price so that it has time to go more points from the beginning of the deal and the profit is higher. If a trader simply opens a deal at the market, he will not receive part of the earnings, and will also be exposed to risk in case of an error in the forecast.

So, the price has reached the value set by the trader, and the order has been activated. Since a better price is needed, the system waits for further movement in the same direction and opens a deal only at the beginning of a rollback.

This gives a profit of several additional points, which is essentially slippage, but in the trader's favor. Such slippage is called positive.
Another situation may also arise: the order has been activated, but there is no price among the quotes that would be better than the specified one. The system has to look for orders that fit the "best of the worst" parameters. This is how negative slippage occurs, that is, against the trader. However, he still remains in profit if he guessed the further price behavior.

Why slippage occurs on market orders

When opening a deal at market price, a trader often observes the following: he sets a price, presses the order activation button, and it opens at a price that differs by several points.

This is explained by three main reasons:

• the difference in bid and ask prices;
• periods of extremely high volatility;
• the human factor.

Everyone knows that a dealer on the forex currency market, like on other markets, takes a commission for opening transactions. Therefore, orders are opened with a spread: for purchase - above the specified price, for sale - below. It happens that spreads widen very quickly, and slippage occurs during the execution of the transaction. No trader is immune from this with any intermediary. In order to receive quality services, you need to pay for them.

In a volatile market, slippage occurs much more often. As a rule, such situations occur during periods of very high volatility. This depends on a number of factors, the most significant of which is the release of high-impact news.

Thousands of traders enter the game in pursuit of short-term profit. Since the market is feverish, quotes jump, counter orders do not have time to be executed at the closest cost. Slippage can be serious and can be observed not only when opening but also when closing transactions. Sometimes the execution of orders is delayed for several minutes, which leads to large losses.

The human factor occurs in manual trading, when automatic systems are not used. A trader cannot make a deal as quickly as a machine does. While a person presses the execution button, several dozen or even hundreds of deals are made on the market. Therefore, the price may already differ from the one specified in the application, and the system will select the optimal one. If it turns out to be worse, it will not be anyone's fault - this is the peculiarity of the market.

Is sliding bad?

It is best to avoid slippage for a more stable trading experience, but this is not necessarily a negative event as the price difference can be both favorable and unfavorable for the trader. You can classify the executed order price as positive slippage, negative slippage, or no slippage.

Positive slippage: the ask is lower when buying or the bid is higher when selling.

Negative slippage: the ask is higher when buying or the bid is lower when selling.

Slip management

The best way to manage slippage is with limit orders to moderate market volatility.

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