What is Slippage in Forex Trading?
When you begin to trade Forex, you are inundated with a whole host of new terms. One of the ones that you will most certainly run into is what is known as “slippage.” Simply put, slippage is a difference between the price you see and the price that you pay. For example, you may find yourself looking at the EUR/USD pair with an ask price of 1.1267 as you press the button. However, you notice that you got filled at 1.1269. This is what would be slippage, by two pips.
It’s not necessarily nefarious
The fact that you got slipped on the trade isn’t necessarily a nefarious thing. Unfortunately, in the past there were several Forex brokers that would take liberties with their clients. This was long before currency trading became much more common, and perhaps regulated in larger countries. After all, even places like the United States were a bit behind it when it came to investor protections in the Forex markets, because it was a sudden explosion of interest that caught many regulators off guard. Beyond that, it’s a noncentralized market, so it’s very easy to see how difficult it was for regulators to get their hands around the entire situation.
Fast-forward to present day, and most Forex brokers are heavily regulated. (In fact, if you are working with a Forex broker that is not regulated, you should withdraw your money immediately and place your money in a more reputable broker.) While one could make an argument that it’s awfully tempting to slip your customers every time, they try to place a trade, the reality is that most accounts aren’t large enough for that to make the risk acceptable to a broker even if they were less than honest. The fines that some of the regulatory bodies have laid out on brokers over the last several years had been massive, and it has cleaned up the industry drastically. With the average retail account being roughly $2000 in the United States, a few cents here and there simply will be worth the millions of dollars that a brokerage would face. Research shows that accounts around the world are roughly the same size on average as well. The math simply doesn’t work out.
Most of the time, there is a perfectly easy explanation
I’d be willing to bet that over 95% of the time that I read some type of negative review online about slippage at a brokerage firm, it has something to do with trading the news. Trading the news is a sucker’s game, and although you can get very lucky occasionally, you need to understand that liquidity is a major issue. What this means is that there aren’t as many orders. So for example, if you are looking to buy the Swiss franc, there needs to be somebody willing to sell it. When you put in a market order, you are telling the broker that you want to buy the Swiss franc at the best price available. What do you think that means if that best price is three pips away? Exactly. You just bought the Swiss franc three pips away from the price you are looking at. This has nothing to do with the broker, they are simply there to match orders. If there’s nobody there to sell you the Swiss franc at the quantity you want, they are simply facilitating the order that you gave them.
During normal trading, slippage is almost unheard of, because the Forex markets of course are some of the most liquid in the world. There are some rather thin pairs that tend to slip more than others. For example, if you are trading something like the NOK/JPY pair, it will more than likely not have the volume of one of the major pairs like the USD/CAD pair. (This is exactly why the spread is higher in these pairs.)
If you don’t want to be slipped while trading, you can put in a limit order, telling the broker that you are willing to pay this price or better for a currency. If the markets skip your price, you simply are not filled. At least you haven’t paid more than you wanted to.