Tuesday, April 5, 2016

What is Slippage in Forex Trading

In our previous article, we’ve discussed about how does a forex order get executed in online trading. Some types of forex orders are also briefly mentioned in that article. Today, we’ll discuss about what slippage is and how does it work in forex trading.

First of all, what is slippage? Slippage is the difference between the specified price and the actual transaction price. It is the difference between the price you want a security to be traded at versus the price your broker actually executed it at.

Slippage commonly occurs in forex trading, especially every time the trader places a “market order”. That is because, every time the trader places a “market order”, he entitles the broker to buy or sell a security based on the current “market price”. If, for example, the Euro is currently trading at $1.20 dollars and the trader thinks this is an acceptable price to purchase Euro, then he can place a market buy order.

Say for example, the trader wants to buy 100 EUR and places the market order at the current market price of $1.20, the trader might think that the transaction will only cost him $120. However, since the market order authorizes the broker to buy the currency at the current market price, there is always a chance that the market price will fluctuate before the order gets executed.

If, for example, the current price moves to $1.21 at the time the trade gets executed, then the total transaction cost will become $121 instead of $120, making the trader pay $1 more than the expected total transaction price. The extra $1 here is what traders call as “slippage”.

Whenever the traders hear the word “slippage”, oftentimes they talk about it in a negative light. However, slippage isn’t always against you, and it might even turn the tide in your favor.

Let’s say that the price movement turned the other way, and the price went lower to $1.15 per euro instead of $1.20, then the total transaction price will now become $115 instead of $120, saving you a total of $5! Sounds cool, right?

Learn more about how the forex market works and fully understand what is forex by reading our educational articles. See who the best forex brokers are, visit Wibestbroker.com to find out!

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