What causes slippage in forex trading?
If you are a beginner forex trader, having an understanding of what slippage is all about will help you decide on the type of orders you will use when trading the markets.
Slippage in forex trading refers to the difference between the expected price of a trade and the price at which the trade is actually executed by your broker.
There are several factors that can cause slippage, including:
- Volatility: During periods of high market volatility, it can be difficult for you to execute trades at your desired price. This is because the market is moving quickly, and the bid-ask spread can widen, making it harder to execute trades at the desired price.
- Liquidity: Low liquidity in the financial market can also cause slippage. When there are few buyers or sellers in the market, it can be difficult to execute trades at your desired price, as there may not be enough market participants to match the trade.
- Order Type: Certain types of orders, such as market orders, can be more susceptible to slippage. Market orders are executed at the current market price, which can be different from your desired price, while limit orders are executed at a specific price or better.
- Market Impact: When a large trade is placed by hedge funds and other Institutional investors, it can move the market, causing slippage for retail traders. This is because the large trade can cause the bid-ask spread to widen, making it harder for you to execute trades at your desired price.
- Broker Execution: Slippage can also occur as a result of how a broker executes your trade. Some brokers may use a practice called “last look” in which they can reject a trade if the market moves against the trader during the execution process.
- News and Events: This often leads to losses if you don't watch your fundamentals when trading. An unexpected news or event which can move the market quickly, for example, a sudden interest rate hike, can cause slippage for traders.
See also: What Is More Important, A Higher Win Rate Or Higher Return Per Trade?
In conclusion, Slippage can be caused by several factors, including volatility, liquidity, order type, market impact, broker execution, and unexpected news or events.
However, You should be aware of these factors and take them into account when placing trades to minimize the risk of slippage and avoid trading in times of high volatility.
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