First, let me tell you how I learned about slippage. It seems I didn’t pay enough attention to something known in the Forex world as “slippage” which is defined as the “negative pip value between where a stop loss order becomes a market order and where that market order may be filled.”
You can see where this is going already, but let me set the stage…
Last week, I entered my regular $5,000 buy EUR/USD trade on the trading platform of choice. I expected some data to come out that would appreciate the Euro (of course, if it came out the way I wanted it to, it would). I watched the trade closely as it approached the time of data release, and saw that my pair was moving into green (profitable) territory. Yeah!
Then, just a minute before the data release, someone knocked on my gate and I went out to see who it was (it was the garbage men, since I know you really want to know). And, of course, since I was the only one home I had to let them in to take our bins out (yes, we have door-to-door garbage service here in Africa; it costs GHC 2 extra but you have to watch them like a hawk because they won’t take all of the trash unless you’re there).
Anyway, by the time I got back inside, my trade was tanking. Big time! Like lightening, I mouse-clicked the trade closed, and was happy to get away with a loss of only $26.50. Whew. Crisis averted.
At least, that’s what I thought.
Fast forward a few days and I have another trade open ($5,000 selling NZD/CHF, if you’re curious – I’m trying to branch out beyond my comfort zone). I let this one flip back and forth for a while, certain as I was that the safe haven draw of the Swiss Franc would bring the pair around my way. Which it eventually did, and I closed it out when I was ahead a bit (I’m not too greedy).
I was curious to see my account balance, but because I was using the Java-based platform that isn’t really clear. On the downloadable applet, it’s always right at the bottom of the screen, so you know what you’re margin is and how much money you’ve got to play with. I had to look around to find the account tab on the site, but find it I eventually did, much to my chagrin.
Account balance: $51.50.
Let me tell you I was shocked, floored, totally blown away by this. I don’t know it to the penny, but I have a pretty good idea how much money I’ve got to play with and I had expected to see that balance closer to $75, give or take a few bucks. (Stop sniggering – no one ever said I was a big spender, and up until recently, I have made this original $100 last a long, long time.)
To say I was confused would be an understatement. Why? That doesn’t make sense, I thought. I clearly recall the feeling of relief, closing that trade and knowing that I would only lose $26.50. I remember later on going to see how EUR/USD was faring, and thanking my lucky stars that I got out when I did.
This is how I learned my lesson and discovered what “slippage” is and what “slippage” does. Apparently, my cancel order was actually a “request” to cancel order, and it was actually executed a few moments after the request. How long was the delay? Don’t know exactly, but certainly long enough.
Here I was thinking I was only down $26.50, but by the time that close order was actually executed – and given the extreme volatility that day – that trade lost another 40 or so pips. Slippage? Heck, $49 ain’t slippage. That’s a head-over-heels fall.
Oh, second lesson learned? Never trade on garbage day.