February 19, 2021 | AtoZ Markets – As traders start to trade in forex, they are inundated with a whole host of new terms. And one of the most common traders could run to is the thing that they call 'slippage.'
Slippage is the difference between the price traders see and the price they pay. For instance, you might end up seeing the EUR/USD pair with an ask price of 1.1267 as you press the button. But you'll see that you got filled at 1.1269 - this would be the slippage by two pips.
Not Everything is Bad News
Getting slipped on the trade does not mean it's a nefarious thing. Historically, there are some forex brokers that would take liberties with their clients. But this was long before currency trading became much more common and regulated in developed countries.
After all, like the United States, such places are somehow behind it when it came to investor protections in the forex markets. And this is because it was an unexpected explosion of interest that caught many regulators off guard. From that, it's a noncentralized market, so it is easy to realize how hard it was for regulators to get a hold of the whole situation.
And now, most forex brokers are heavily regulated. If traders are working with a forex broker that is not regulated, they must withdraw the money quickly and put it in a more reputable broker. As one could argue that it is incredibly tempting to slip the customers every time they attempt to place a trade - the truth in here is that most accounts are not large enough to make the risk acceptable to a broker even if they were less than honest.
Some of the fines laid out by several regulatory bodies on brokers during the past few years have been massive. Also, it has cleaned up the industry drastically. The average retail account is approximately $2,000 in the United States, while a few cents here and there will be worth the millions of dollars that a brokerage would face. In a research, accounts around the world are about the same size on average as well. The math does not simply work out.
Most of the time, some type of negative review online about slippage at a brokerage firm has something to do with trading the news. In addition to that, trading the news is a sucker's game, and traders can become lucky occasionally - everyone needs to understand that liquidity is a major issue. And this means that there are not as many orders.
For example, if traders are looking to buy the Swiss franc, there needs to be someone willing to sell it. After that, when they place it in a market order, they tell the broker that they want to buy the Swiss franc at the best price available. And what does that mean if that best price is three pips away? Precisely, traders purchased the Swiss franc three pips away from the price they are looking at. Also, this has nothing to do with the broker; they are there to match orders only. If no one is available to sell traders the Swiss franc at the quantity they want, they are merely facilitating the order that traders gave them.
On regular trading, slippage is nearly unheard of because the forex markets are some of the world's most liquid. Several relatively thin pairs tend to slip more than others.
Nevertheless, if traders do not wish to slip while trading, they can place a limit order. They can tell the broker that they are willing to pay this price or better for a currency. Then, if the market skipped the price, traders are not filled - and they don't have to pay more than they wanted to.