You have probably read or heard the term Forex slippage, but what does it mean, what does it reveal about the Forex market and Forex brokers, and how can you avoid it? I have analyzed all aspects of Forex slippage. In this article, we will explore what it is, why Forex traders should avoid Forex brokers with frequent negative slippage, how positive slippage will improve your profits, how you can sidestep most Forex slippage, and why you should not trust market makers with guaranteed stop-loss orders.
What Is Price Slippage?
Price slippage refers to the difference between the order and the executed price. It occurs primarily in illiquid assets or during volatility spikes while liquidity fades. The Forex market is the most liquid market, with daily turnover exceeding $7 trillion, making Forex slippage a non-factor in major currency pairs at Forex brokers offering deep liquid pools. Negative slippage means the price is worse than the order price, lowering profitability. Some of the best Forex brokers deliver positive slippage via price improvement technology, meaning the price is superior to the order price, increasing profits.
How Slippage Happens in Forex
Slippage in Forex is a non-factor in 99.9% of trades if traders use an ECN or NDD Forex broker that connects to multiple liquidity providers. Brokers using the market maker model experience Forex slippage more frequently, as they often lack access to deep liquidity and dark trading pools. Minor and exotic currency pairs will experience negative Forex slippage occasionally, but major currency pairs should never have Forex slippage beyond one to three pipettes.
Here is an example of positive Forex slippage:
- A Forex trader places a EUR/USD buy order at 1.1195
2.Their Forex broker executes the order at 1.1189
3.The executed price is 0.6 pips better than the order price, which is $6.00 per 1.0 standard round lot (usually only if cutting-edge price improvement technology exists and the Forex broker has 20+ liquidity providers)
Here is an example of negative Forex slippage:
- A Forex trader places a EUR/USD buy order at 1.1195
2.Their Forex broker executes the order at 1.1201
3.The executed price is 0.6 pips worse than the order price, which is $6.00 per 1.0 standard round lot (Forex slippage on major currency pairs is a significant red flag, suggesting a lack of liquidity providers, an inadequate trading infrastructure, or a simulated, manipulated trading environment)
How to Avoid or Reduce Slippage in Trading
Forex traders can follow some basic trading guidelines to avoid Forex slippage. I recommend traders consider my tips below.
Tips on avoiding or reducing slippage:
4.Only trade with Forex brokers that have access to deep liquidity
5.Avoid Forex brokers acting as market makers
6.Use limit orders versus market orders, but check your broker’s execution policy on slippage
7.Avoid trading during high-volatility events like economic news releases
8.Avoid trading illiquid currency pairs
9.Trade highly liquid assets during low volatility periods
10.Trade with brokers that execute orders in less than 30 milliseconds
11.Use ECN/STP/NDD communication, order execution, and post-processing Forex brokers
Noteworthy:
12.In extreme market events, Forex slippage is unavoidable, but they usually happen once or twice per decade
13.Avoid Forex brokers with guaranteed stop-loss orders, as they are unrealistic and only possible in a manipulated trading environment
What Is Slippage Tolerance?
Traders can set a slippage tolerance, but I urge caution. The best Forex brokers have zero to near-zero slippage.
Here is an example of slippage tolerance:
14.A trader places a EUR/USD buy order at 1.1150 with a 5-pip slippage tolerance
15.Therefore, the Forex broker will execute the buy order anywhere between 1.1145 and 1.1155
Slippage Across Different Asset Classes
Most traders refer to slippage when talking about equity and Forex trading. The cryptocurrency sector is most vulnerable to negative slippage, followed by the commodities trading sector, as they are less liquid than Forex but react equally fast to events.
Top Forex Brokers
My Take
Forex slippage occurs during high-volatility events in low-liquid assets. The best Forex brokers ensure zero to near-zero slippage and deploy cutting-edge price improvement technology that delivers positive slippage favorable to traders. I recommend avoiding Forex brokers acting as market makers.
