Slippage refers to the difference between the expected price of the transaction and the execution price of the transaction. Slippage can occur at any time, but the most common situation is the period of greater volatility when using market orders.
There is also a special situation, that is, the trader's order for buying and selling is very large, and there are not enough reverse orders in the market to accept, resulting in a difference between the expected transaction price and the actual transaction price.
Slippage is not a derogatory term, which is different from the understanding of many people, because any difference between the expected execution price and the actual execution price is a slippage. There is a 50% probability that the trader will get more slippage profit. .
For example, a trader sells USDCHF at a market price of 0.8912, and then the market drops 100 standard points and then reaches 0.8812. At this time, the trader wants to close the long order and take profit, but when the position is closed, the market moves violently, and 2 standard points appear. The slippage and the final closing price was 0.8810. As a result, the trader finally realized a return of 102 standard points.
Objectively speaking, the final execution price and the expected execution price can be divided into three categories: positive slippage, no slippage, and negative slippage. No slippage is the most ideal state and the most common situation when trading.
Positive slippage may be undesirable, but it often occurs when the market is running violently and traders place orders against the trend. For example, when the gold market is falling sharply, traders place a buy order at the market price. At this time, the actual transaction price is easily lower than expected. final price.
No one wants to see negative slippage, especially when the sliding interval is very large. If traders don’t want to be bothered by negative slippage, don’t chase orders and go short when the market is falling sharply, and don’t go short when the market is violent. Chase orders and do more when it arises, and don't buy and sell varieties that fluctuate extremely sharply when the black swan event occurs, such as the USDCHF exchange rate during the Swiss franc black swan period.
In order to avoid slippage, many traders habitually use pending orders. This seems like a good idea, but it actually hides a huge risk.
If the slippage is caused by the time delay for the client's order to be delivered to the exchange, then pending order trading can completely solve this problem. If the reason for the slippage is that the market is running too violently, then the pending order transaction can easily lead to the inability to complete the transaction.
For example, the market price of crude oil trading is declining sharply at US$48.28. A trader’s pending order to sell is at the price of 48.20, and the market has a slippage. The market quotation gapped directly from 48.28 to the price of 48.10. This gap is the slippage, and it has been crossed. If the trader places a price of 48.20, then this pending order will not be executed.
It should be noted that slippage may occur in any market, the foreign exchange market will appear, stocks trading, futures, bonds and crude oil market will also appear. However, this does not mean that all slippages are normal. There may be some abnormal slippage conditions.
In the market of non-market makers, slippage problems are basically normal; in the market of market makers, after the slippage occurs, traders need to take out international quotations or other brokerage quotations for comparison. If the quotation is consistent with the international quotation, it is a normal slippage; if the difference is large, it needs to be handled carefully.
In addition to the slippage in buying and selling, there will also be slippage in the stop loss of pending orders.
The slippage mechanism of the pending order stop loss is the same as the previously mentioned pending order trading mechanism. Because stop loss is directly related to risk management, its impact is much more serious than buying and selling pending orders.
Traders need to have a clear understanding: the executed trade order is not safe if the stop price is not set. It is not a good habit for traders not to watch the trading market for a long time when there is an open position.
If the market moves too violently and there is a slippage near the stop loss price, resulting in the pre-set stop loss not being executed, this will result in a very serious risk exposure.
The concept of liquidity is simply understood as the number of people participating in the same type of transaction and the total amount of funds. If there are many people with large funds, the liquidity is good; otherwise, the liquidity is poor.
The most liquid varieties in the foreign exchange market are EURUSD, followed by British pounds, Japanese yen, Canadian dollars, Australian dollars and so on. Traders are not recommended to participate in niche currencies, such as krona, lira, ruble, etc.
Since the trading volume of these niche currencies is not large, a small amount of large funds can easily lead to slippage.