The so-called slippage refers to a phenomenon in which there is a difference between the designated transaction point placed by the customer and the actual transaction point during a transaction. Slippage most often appears in market orders, but when there is a market quotation fault, the triggering of a limit order will also cause slippage. Major slippage usually occurs together with important risk events. In addition, when the market is lightly traded, market volatility will be amplified, leading to wider slippage, and even a series of programmatic trading limit orders triggered by an unexpected price fluctuation, leading to a currency pair flash crash.

What is the harm of foreign exchange slippage?

The most famous is the Swiss franc black swan incident. On January 15, 2015, the Swiss National Bank suddenly announced the abolition of the lower limit on the exchange rate between the euro and the Swiss franc, which had been maintained since September 2011. This caused the market to experience the largest volatility since the 1970s. The catastrophic slippage caused by the event still affects the entire foreign exchange market. Major banks have suffered hundreds of millions of dollars in losses and crushed many brokerage companies with insufficient financial resources. The largest domestic FXCM Group once withdrew from the US market. The brokers such as HMAFX platform and FXDD are able to protect themselves by virtue of their strong strength.

For short-term traders in foreign exchange trading days, slippage is the most unwilling situation to see. Intraday short-term traders have a very short holding time, and they will immediately make multiple transactions within one trading day. As far as the foreign exchange market is concerned, the daily fluctuations of its mainstream product currency pairs are generally in the 50-80 base point segment.

Depending on the volatility of the specific sales market, short-term traders will lock each profit segment at 10 benchmark points or even less. If the entry price selection is not very effective, and there is a slippage situation, short-term traders basically have no way to have a profitable indoor space, and they have to bear the potential damage and transaction costs. Therefore, intraday short-term traders are very concerned about transaction costs such as “spread” and transaction fluency problems such as slippage. Transaction costs and transaction fluency determine the selection of short-term traders in foreign exchange trading days.

Generally in order to prevent slippage, intra-day ultra-short-term traders generally choose sales markets with high trading liquidity and high volatility. The key to foreign exchange transactions are Euro/U.S. dollars, U.S. dollars/day bars, Euro/U.S. dollars, and British pounds/U.S. dollars. Among them, Euro/U.S. dollar and Euro/U.S. dollar are the most interesting sales markets for ultra-short-term traders. Generally, the trading liquidity of this kind of property is sufficient, the slippage is less, and the spread is low-cost.

For stock swing or long-term stock traders, slippage is less harmful to the overall trading and the psychological state of investors. If it is not an extreme market trend, it is all acceptable. Under extreme market trends, the harm caused by slippage will be destructive, and the results cannot be controlled.

For example, if you buy 1 standard lot of EURUSD, the slippage is 5 basis points, and the loss caused to you is 50 dollars. If you are a mid-to-long-term trader who has held positions for several weeks or even months, of course, you don’t need to pay attention, but if you are a short-term trader and hold positions for only a few hours, such a slippage distance may affect your trading results. Great adverse effects.

Let’s calculate an account: If you trade 10 standard hands a day, 220 standard hands a month, 2640 standard hands a year, each slippage is 5 basis points. The additional slippage loss for one year will be 2640510=132,000 USD. I really don’t know, I was taken aback, the so-called miss is a tiny bit, a thousand miles away, this is the situation, this is the danger of slippage!

When is the maximum slippage likely to occur

How to avoid possible losses or even liquidation caused by slippage during major news events or data release?
How to avoid possible losses or even liquidation caused by slippage during major news events or data release

The biggest slippage usually occurs with important risk events. Day traders should avoid trading during periods of major risk events such as the Federal Reserve’s interest rate resolution or non-agricultural data. The violent market volatility seems full of temptation, but it becomes difficult to obtain the expected price. If you are trading at this time, you may face significant slippage risk.

The most unfortunate is the major slippage caused by breaking news or announcements. In fact, if you do not trade during an important news event, then most of the time, using stop loss can avoid slippage problems. However, if you encounter a sudden situation, you can only watch the loss gradually expand. Such slippage is inevitable. But even so, managing transaction risk is still very important.

Slippage is more likely to occur in a lightly traded market, and lightly traded is more likely to amplify market volatility and cause slippage to expand. The liquidity of stocks, futures and foreign exchange currency pairs is relatively sufficient, which can effectively reduce the occurrence of slippage. If foreign exchange is traded during the opening hours of London and New York, then most currency pairs have sufficient liquidity and less slippage.

Some traders do not apply stop-loss orders to avoid slippage. In extreme market conditions, you may trade at a bad price, but in this case, whether you use a stop-loss market order or not, the final transaction price may be bad. Control your risks and do not trade when major risk events occur, then you can avoid major slippage.