The risk of slippage is usually very high when trading the news. Currency prices tend to move very fast during such highly volatile market conditions. Slippage occurs when the price you intend to enter or exit the market is different from your actual transacted price.
Slippage is the biggest problem when the market moves fast. Placing stop or market entry orders under such times do not guarantee anything. These orders do get filled but mostly at different prices than you had intended.
Most of the brokers had taken the opposite position themselves as the fast moving market did not allow them to offset these orders in the interbank market. As the broker has the opposite position, if you lose, the broker wins and makes profit. The broker is in fact trading against you now. Many forex brokers will wait till after the big market move is over. Then they will fill your entry order. Sometimes, these entry orders may even get filled past your stop loss or profit target. This means that you would be left with immediate net loss.
Slippage is a trick that many forex brokers use in order to make profit by filling your position with a negative spread. Before filling your entry order with wide slippage, many brokers will fill your stop loss or take profit order. The wider the slippage, the fatter the profits the broker is going to make. Imagine the number of orders placed with each forex broker and the amount of profits the broker makes from one such single event.
Lets take an example. Suppose you have placed your long entry stop for EUR/USD at 1.2564. Your profit limit is 1.2594. The forex broker may first fill your take profit at 1.2594 and then fill your long entry stop at 1.2604 with a 40 pips slippage.
If filled at the prices you wanted, your trade would have resulted in a profit. But now you have a net realized loss. If the trade goes against you, the forex broker may fill your stop loss order first and then fill your entry order with slippage after that so as to widen their profits.
Suppose, you had placed your long entry stop at 1.2564. You place your stop loss at 1.2544. The broker could first fill your stop loss at 1.2544. Then fill your long entry stop at 1.2594 with a slippage of 30 pips. You now have a net loss of 50 pips due to slippage instead of planned 20 pips loss.
The larger the slippage you experience, the more you stand to lose and the more the forex broker stands to make a profit. As an individual trader, you should know that during news when the market moves fast, some forex brokers add slippage to any of your orders to increase their profits. Your orders will be kept pending till you get stopped out or your profit limit is reached.
Many forex traders readily accept the risk of slippage. Most news traders consider slippage as one of the realities of trading the news. However, you as a forex trader should know that slippage can eat up a huge chunk of your profits. In the end slippage can affect your overall profit and loss. Read more in the next article how you can overcome the problem of slippage through the use of stop-limit entry order.
Author Resource:-
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading stocks and currencies. Know These Forex Broker Games. Learn Forex Trading!
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