When entering the Forex trading industry, one thing traders should pay attention to is Slippage. Although it may seem like a minor issue, the consequences are not small. There are many cases where we place an order but do not get the desired price. This is known as "Slippage" because the Forex market is highly volatile. If the trader doesn't plan well, it can happen.
In this article, we will understand what Slippage is, its advantages and disadvantages, to warn traders about possible risks when investing in assets.
What is slippage?
Slippage refers to the deviation between the price at which the trading system generates a buy/sell signal and the actual price at which the trader can execute the trade. It usually occurs due to high market volatility and low asset liquidity, it impacts periods where appropriate trades cannot be executed as the trader intended.
The main causes of Slippage
There are two main causes of Slippage in Forex:
1. Investors period of high market volatility
Investors place orders during periods of high market volatility, such as before and after important news events that have a big impact around the world.
During this period, there may be significant positive or negative effects affecting the currency pair, resulting in highly volatile price movements. As a result, the trader may not get the desired price.
2. Investors place orders in advance
Investors place orders ahead of the open or closed market, as these periods usually have relatively low trading volumes and lower market liquidity. This can make it difficult to execute trades at the desired price.
Advantages and Disadvantages
It can have both pros and cons, as it can increase or decrease profits. The advantages and disadvantages of slippage include:
–Advantage
When placing a buy order for EUR/USD at 1.10000 and experiencing a Slippage resulting in a price of 1.09950, that can be a favorable price. As a result, when a trader closes a trade, they may make a higher profit than expected based on their analysis.
– Disadvantages
When placing a buy order for EUR/USD at 1.10000 and experiencing a Slippage resulting in a price of 1.10050, it can be an unfavorable price. As a result, when a trader closes a trade, they may make a lower profit than expected based on their analysis.
Slippage Conclusion
Slippage is something that traders cannot ignore because sometimes traders can overlook this, resulting in both positive and negative overall profit potential.
Therefore, traders must always follow the news and information about the currency pairs they trade in order to reduce the potential risks that can occur in the Forex market.
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