Slippage can occur both when a trader enters a market or exits the market. When a market order is placed via a no dealing desk broker, the trader is provided with a bid/ask price on their trading platform and uses this to place the trade. If, however, this price is not available for their order at the time it is executed, it will be filled at the next available price in the market; or part of the trade may be filled at their requested price, but the remainder filled at the next best available price.
Slippage can be a symptom of high market volatility, which can occur immediately after a news opening, for example; or low market liquidity, which can occur when trading currency pairs that are rarely traded. Execution speeds play a major role in slippage. Any delays between the initiation of the order and the execution of the order can result in a price change. Delays can be caused by the trader using a poor internet connection or by placing the trade through a broker that does not offer the most advanced technology, affecting the speed at which they are capable of executing orders.
A trader will want to maximise positive slippage and reduce or avoid negative slippage where possible.
Minimising Negative Slippage
Slippage can be avoided by using brokers who offer instant execution rather than market execution. This is because the trade is guaranteed to be executed at a specific price. The issue here, however, is that if the price that the trader requests becomes unavailable due to the time lag between the placement of the order and its execution, a requote from the broker will be necessary, causing further delays. Successive requotes, particularly during fast-moving markets, can mean that a good trading opportunity is lost; whereas a market execution order would have been filled at the next best available price.
One way of controlling the price at which the order is executed is to set a market range. This will allow a trader to limit slippage as the order will cancel rather than be filled at a price that has slipped outside of their specified range. Where a trader authorises partial fills, only part of the order will cancel if the remainder can be filled at a price within the trader’s market range.
Another way to mitigate the risk of negative slippage is to use a broker with proven low slippage rates. Brokers using advanced technology who can offer fast execution speeds are preferable for traders wanting to reduce the impact of slippage on their trades. ECN (Electronic Communication Network)< / STP (Straight Through Processing) brokers offer automatic rather than manual execution, which means trades can be processed at very high speeds.
Avoiding trading in highly volatile markets is another way to reduce slippage, however, this will also limit the trader’s opportunity to benefit from positive slippage when the market moves in their favour.
Maximising Positive Slippage
If a broker offers price improvements, this means that when an order is to be filled at the best available price in the market, if a better price becomes available at the time the order executes, this will be the price that the trader receives.
When limit orders and limit entry orders are used by a trader, this means that the trade can only be affected by positive slippage as the requested price or a better price is guaranteed.
Finding a Low Slippage Broker
Choosing a no dealing desk, ECN / STP broker, with up-to-date systems and fast execution speeds, is the best way to reduce the impact of slippage on an order.
Brokers with fast execution speeds such as XM publically state on their website regarding the execution policy and speed.
It is also beneficial to look for a broker that offers price improvements as this means that the trader can receive positive slippage on their order if the price rises sharply past a set limit. Brokers such as FXCM offer clients positive slippage.
Using a regulated broker is always recommended, as it will mean that the broker is working to standards that assure a clients interests are protected.
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