Don't Underestimate Slippage: It Can Lead to a Margin Call!

Slippage in forex trading occurs when your order is executed at a different price than requested. While it may seem simple, the impact of slippage can be significant, potentially leading to a margin call (MC). Therefore, it's crucial for traders to understand what slippage is and how to mitigate its effects.

Understanding Slippage

Slippage happens when an order is executed at a different price than requested. This can occur due to various reasons, including market volatility and liquidity. Slippage can be positive or negative, depending on whether the execution price is better or worse than the requested price.

1. Positive Slippage: For example, you place a buy order for EUR/USD at 1.1300, but the next best price is 1.1290. Your order will be executed at 1.1290, which is better than your requested price.
2. Negative Slippage: If you place a buy order at 1.1300 and the next best price is 1.1310, your order will be executed at 1.1310, which is worse than your requested price.

Causes of Slippage

Slippage often occurs when the market is imbalanced, meaning there is a mismatch between trading volume and price demand between buyers and sellers. This condition typically happens during the release of significant news or economic data. For instance, during the release of the US non-farm payroll (NFP) data that exceeds expectations, the market can react swiftly, resulting in slippage.

How to Mitigate the Impact of Slippage

While slippage cannot be entirely controlled as it depends on market conditions, there are several ways to reduce its risk:

1. Limit Orders:

   • Definition: A limit order will only be executed at your requested price or better. For example, if you use a buy limit order at 1.1301, the order will only be executed if the price is at or below 1.1301.

2. Market Order Deviation Range:

• Definition: Some brokers offer a price deviation feature for market orders. You can set a slippage tolerance, such as 3 pips. If the slippage exceeds 3 pips, the order will not be executed.

Understanding and managing slippage is vital for maintaining trading performance and avoiding significant losses. Using limit orders and price deviation features are two effective methods to reduce the impact of slippage. By understanding these techniques, you can be better prepared to handle slippage and optimize your trading strategy.

If you have any suggestions or additional methods for dealing with slippage, please share them in the comments section of this article. Happy trading!

Share: