What is Slippage in Forex?

You bought the EUR/USD at 1.4000 and the market is now trading at 1.4025.

Since there is an economic release due out in 15 minutes, you move your protective stop up to 1.4000 to protect your winning trade from turning into a losing trade.  The number is released and the market trades down through your stop level to as low as 1.3975 in a matter of seconds.  But instead of getting filled at your price of 1.4000, you are filled at 1.3990 and now have a losing trade on your hands. 

Why?  The answer is that there was nobody willing to take the other side of the trade at your price.  A trade is when two people agree on price but disagree on value.  One thinks the value is too high and the market should move down while the other thinks the value is too low and the market should move up. 

When a major economic number is released, the volume dries up as most big traders stand aside.  They will not trade if they cannot identify their risk.  So there is not as much volume as you would see in a normal market environment.  However, there are still plenty of traders trying to take advantage of the volatility.  They will all want to trade in the direction the market should take based on the number released. 

So if everybody thinks that the market is going down, all these traders try to sell at the same time.  The problem is that there are not many traders looking to buy if the market is falling quickly.  So the market continues to fall until the buyers step in and start taking the other side of the trades.  But they are buying at their price, not yours.  In the example above, a sell stop order becomes a market order once the price designated is printed.  So when the market traded down to your stop level of 1.4000, your order then became a market order. 

When you are selling at the market you are matched up with somebody is buying.  If they are only buying below your sell stop price, you will be filled at that level.  This is called slippage and it is present in every market in the world.  This brings us back to why many big traders do not trade in this environment.  So if you are trading in a volatile market environment, you have to be prepared for slippage.  It is the nature of the game.

Thomas Long, FX PowerCourse Instructor
FXCM

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