Tips And Tricks To Avoid Forex Slippage When Trading

Have you ever found yourself in a situation where you executed a trade at a specific price but filled at a different one? That’s slippage for you. It’s not mere chance or bad luck. Instead, it’s the inherent volatility and rapid price movements within the Forex market.

Slippage occurs for various reasons, from sudden economic announcements to limited liquidity or even technological lags. While some reasons are commonly acknowledged, others may have yet to be. Anyhow, the outcome remains the same: poor trading experience. This article will address some reasons why slippage occurs and ways to tackle these reasons. 

1. Use A Broker That Offers Low Spreads And A Fast Execution Time.

Every decision that you make will impact your trading decisions. Since your broker connects you to the forex market, you should pick a broker that provides you with uninterrupted execution to avoid slippage. Here’s how they influence slippage:

• Execution Speed: Consider a fast-paced trading platform where traders are placing a large number of orders at the same time. If your broker is quick, you might get the price you aimed for. Fast execution by your broker ensures you lock in your desired rate. Hence, partner with a broker known for swift trade execution. 

• Spread Size: In Forex, the spread is the difference between the bid and ask prices of currency pairs, like a gap between two traders negotiating a deal. A narrower gap means they’re closer to agreement, reducing your risk of slippage. Therefore, you need to look for brokers offering tight spreads so that you can execute your order at your requested price. Since spreads are different for different pairs, you can use a Forex spread calculator to calculate the spreads for the pairs you wish to trade.
• Liquidity Providers: For a smooth trading process, a good number of active traders should be present in the market. If there are fewer traders, deals become scarce, leading to potential slippage. Similarly, brokers need a strong network of liquidity providers to ensure seamless trades. So, aligning with brokers connected to a diverse range of top-tier liquidity providers is best. It ensures there’s always a deal on the table, ready to be struck.
• Technology Infrastructure: The efficiency of the trading process is heavily dependent on the technology infrastructure and how fast they process your requests. If your request isn’t heard on time, you will miss it. Your broker is responsible for ensuring that your trades are executed without hitches. Hence, you should sign up with brokers who have state-of-the-art technology. It guarantees your orders are being executed in real time without any delay.

2. Make Sure You Place Your Order Outside Of Peak Market Hours.

Have you ever tried to enter a packed subway during rush hour? That’s what it’s like to place an order during peak market hours. The sheer volume of trades can cause delays, leading to slippage. By trading outside these hours, you avoid the rush and ensure a smoother ride.

Here’s how you can navigate around the rush:

1. Understand the Major Forex Sessions: The Forex market operates 24 hours, but not all hours have the same level of trading capacity. The three major trading sessions —the Asian, European, and North American—have their peak activity times. Hence, you should trade your pairs in their respective sessions.
   
   For instance, if you’re trading the EUR/USD pair, the overlap of the European and North American sessions will be bustling. Traders in Asia who are interested in the EUR/USD pair should place their trades during the early European session. You’ll be ahead of the North American influx, potentially reducing slippage.
2. Leverage Technology: Another smart way to reduce slippage is to use trading platforms that offer automated trading or scheduled order placements. This way, you can set your trades to be executed at specific times and be active during less volatile periods.

3. Monitor The Market Volatility To Anticipate Price Movements And Adjust Your Trading Accordingly.

The Forex market doesn’t move in a vacuum. Even minute movements are the result of real-world events, from political upheavals to economic announcements. These events can result in rapid price shifts. For example, a major oil-producing country announces a significant cut in its production. This could lead to a surge in oil prices, impacting the currency values of oil-dependent nations.

If you’re trading a currency pair involving such a nation, being aware of this announcement will help you adjust your trades accordingly. The best way to anticipate price movements is with the help of economic calendars. The knowledge you derive from economic calendars can help you strategise your plan better. You can do this with the help of trading tools, as they will give you a fair idea of how your expected trades will turn out. For example, you can use a pip calculator to calculate the pips you have earned from a trade in the base currency of your trading account to get an accurate idea about the profits you’ve made.

Technical Analysis:

While staying updated with news gives you a macro perspective, technical analysis offers a micro view, giving you insights into price patterns and trends. You can forecast potential price movements by studying charts and using various indicators. 

Example: Consider the Moving Average, a popular technical indicator. If you observe that a currency pair’s price consistently stays above its 50-day moving average, it might indicate a strong upward trend. Armed with this insight, you may go long on that pair, expecting the price to rise further. Conversely, if the price dips below the moving average, it could be a signal to sell.

4. Utilise Limit Orders Rather Than Market Orders To Reduce Slippage Risk.

Your trading outcome depends directly on your precision. Every trader knows the frustration of seeing a favourable price slip away in mere moments. Market orders, while quick, can sometimes lead to trades being executed at less-than-ideal prices, especially in volatile conditions. This is where limit orders come into play.

Let’s understand this with the help of this example. Let’s say you’ve been closely watching the EUR/USD pair – which is at the 1.1800 mark, and you believe there’s an opportunity. Instead of diving in headfirst, you decide to set a limit order at 1.1750. This ensures that your trade is only executed at the price you specify, giving you control and precision.

5. Set Stop-Loss Orders To Protect Yourself From Large Losses In Volatile Markets.

With its constant ebbs and flows, the Forex market can be both a goldmine and a minefield. While there’s potential for significant gains, the risk of sudden downturns is ever-present. To navigate this landscape, you need safety mechanisms in place.

Consider your position in the EUR/USD pair. You’ve taken a long stance, anticipating a rise. But as any seasoned trader knows, the market’s winds can change direction swiftly. To shield your investment from unexpected storms, you set a stop-loss order at 1.1700. With this stop-loss in place, you’re protected from drastic downturns, ensuring your financial ship remains afloat.

Note that setting stop losses is a good strategy to set target profits. They, too, work in the same way and help avoid impassive trading decisions. To set realistic profits, you can use a profit calculator to precisely determine the profit and loss based on your lot size. 

6. Utilise Risk Management Strategies Such As Leverage, Hedging, And Diversification To Spread Out Your Risk.

Why put all your eggs in one basket? Diversification is the answer to minimising the risk of your trade. It means that even if one goes south, the others might still bring in profits. But how do you diversify your trades? Let’s understand this with the help of an example –

You have a budget of $10,000 for Forex trading. There are three different ways you can diversify your trades – 

• Currency Pair Diversification:

Instead of investing the entire amount in the EUR/USD pair, you decide to spread your investment across multiple pairs.

• $4,000 in EUR/USD,
• $3,000 in USD/JPY
• $3,000 in AUD/USD

This way, even if the EUR/USD doesn’t perform as expected, gains from the USD/JPY or AUD/USD might offset the losses.

• Leverage with Caution:

Leverage can boost profits, but it can also shoot up losses. For instance, with 1:10 leverage on your $10,000, you can control a position of $100,000. But, if the market moves against you by just 1%, you could lose $1,000 (10% of your initial investment). You can use a trading calculator to determine the right leverage based on your trading margin so that you don’t lose more than your risk appetite. 

Practical Approach: If you’re confident about the EUR/USD’s upward movement, you might use leverage on this pair but avoid or limit leverage on the other two pairs where you’re less certain.

• Hedging as a Safety Net:

To protect your investment in EUR/USD, you can decide to hedge by taking a short position in EUR/GBP. This means if the Euro weakens (which would cause a loss in your EUR/USD position), it might strengthen your EUR/GBP position, acting as a counterbalance.

Example: If political news negatively impacts the Euro, causing it to drop against the USD, it might still fare well against the GBP, especially if the UK faces its own set of challenges. Gains in the EUR/GBP might offset your loss in the EUR/USD.

Wrap Up

While slippage might seem like an inevitable part of Forex trading, with the right strategies and precautions, you can minimise its impact. As the old adage goes, “Forewarned is forearmed.” You can successfully navigate the Forex market by knowing why slippage occurs and applying the above advice.