What is slippage?
Slippage is the difference between the requested price of a trade and the price where the trade was actually executed.
There are two types of slippage:
Market slippage, and
Market slippage happens when you open or close a positon manually. In other words, this is when the closure of a position is done by you or your EA and not by a market placed Stop-Loss or Take-Profit.
E.g.: You push the “open” button at 1.12345 but the position opens at 1.12347, implying that you have a slippage of -2 points.
The other type of slippage is Stop-slippage:
- This happens when the price exceeds the Take-Profit level, but the position does not get to be closed, or
- when the price does NOT reach the Stop-Loss level, but the position gets to be closed by the broker.
Of course the opposite of these events may also happen, but according to our research these are not so frequent.
What causes slippage?
Slippage could be caused as a result of the following three reasons:
- Poor liquidity: The numbers of sellers and buyers are imbalanced.
E.g.: You would like to buy 1 lot of EURUSD at 1.12345 but there are only 0.5 lots for sale at this price. Therefore the broker needs to find the next available price where it can buy 1 lot. If it is at 1.1238, then you are going to have a -3 point slippage.
- Communication lag. The market price could change in the time that your request takes to get to the server. If the servers of your broker are too far from you, it could take your orders up to 1 second to reach the server. This time is enough for the market price to change, resulting in slippage.
Stop-slippage is never caused by this, because Stop prices are stored at the broker.
Thus you don’t need to send any request in order to close your position by Stop-loss or Take-profit.
- Improper position matching system of your broker. If you use a Market Maker or Dealing Desk broker and if they don’t have enough clients, they will need to hedge the difference to avoid losses. The turnaround of this process could take longer and this could a cause delay in position handling.
Although this slippage is around 1 – 5 points, its effect on your strategy could be very harmful.
What is the effect of the slippage?
Market slippage may cause you a little unexpected profit or loss, depending on its direction and size.
If you are a scalp trader, you need to keep it in control. However, if you use long term strategies, this deviation will not have a significant effect on your strategy.
Stop-Loss Slippage makes your whole strategy uncertain.
We did a test simulating the effect of real slippage to a given strategy.
We saved the slippage values measured on live accounts and we “spoiled” some robots on purpose to move their stop-loss a little bit away, in line with the slippage. In order to have an accurate simulation we ran 10000 tests. The profit ranged between -2373.5$ and +1337$, which is a 3700$-wide range. Without the slippage the profit was 8 dollars.
How can it be controlled? Which broker has the lowest slippage?
Sign up for Forex Broker Stars’ service to get to know what the slippages of your broker are, and also to decide which broker is the most suitable for you!
You can use hidden stops to eliminate the effects of Stop-Loss slippage, but the best solution is to select a broker with low slippages.