Friday, April 8, 2016

What Causes Slippage?

In the preceding article, we have talked about what slippage actually means in forex trading. Today, we will discuss what are the factors that triggers slippage so we could determine why it occurs and how can we avoid it. 

So why does it happen? Why can’t our orders be executed at our specified price? To answer your question, let’s go back to the basics of economics. Basically, the true market is composed of two types of people: the buyers and the sellers. For every buyer who has a specific demand, there must be an equal amount of sellers who can supply their demands. 

The imbalance between the number of buyers and sellers is what causes fluctuation in prices. If the number of buyers exceeds the number of sellers, the price will move higher. On the other hand, if there are more sellers than buyers, then the price will probably go lower.


That is also exactly how things work in the forex market. For example, if the trader places a trade in an attempt to buy 10K USD at an exchange rate of 1.37 EUR, but there are not enough people who want to sell their USD at the specified price rate, then the broker will have to find the next best available price, causing the trader to buy USD at a higher price – giving the trader a negative slippage.

But of course, the opposite could also happen. If there are a lot of sellers who are willing to sell their USD at the time the trader places his trade, then he might find a seller that’s willing to sell their USD for a price lower than his specified price – giving him a positive slippage.

In a very volatile market such as the forex market, the occurrence of slippage is a very common and normal event. However, if you want to know if these kind of occurrences can be avoided, read our article about: “Can Slippage Be Avoided?”.

Learn more about the forex market and further understand what is forex by reading our informative articles. See who the best forex brokers are, visit Wibestbroker.com and find out!

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