7 ways to deal with slippage of orders

Forex trader John sits at the computer. Opens Metatrader and sees an upward trend for EURUSD. Without thinking too tight he pushes the Buy button at the price of 1.1515. The deal opens, but what does John see? The deal was not opened at the price of 1.1515, but at 1.1518!

What happened? Evil machinations of a broker? Illuminati impact? Fed Intervention? No, nothing like that. Just your order is subjected to the phenomenon of slippage. What it is, why it exists and how to deal with it, you will find out now.

What is slippage?

Slippage is the difference between the price at which you are going to make a deal and the price at which it was actually executed.

For example, you see the opportunity to purchase at a price 1.0633:

You press the button “buy”, but it turns out that the transaction is executed at 1.0635.

The difference between the price at which we bought and the price at which the transaction occurred, is 2 pips. These 3 pips that we lost during the opening positions are called slippage.

Slippage can be as positive when the order is executed at a better price for you, or negative, as in the example above.

It is noteworthy that the stop-loss and take-profit can also slip and be executed at a price somewhat different from the one you specified during installation of the order.

Pending orders can also slip, but they have smaller differences, but we’ll talk about them a little later.

Difference

Now let’s try to understand the concepts that many people often confuse and do not fully understand.

Slippage - execution of an order at a different price than the price that you specified during order installation.

Requote - is where there is no price to which you sent the request for the order execution.

Imagine that there was a message about the new prices. You press the buy button and you have a report that there is no such price and an offer to purchase at a new price. This is called requote.

By setting the parameters of the slip in your trade requotes can be avoided.

Slippage - is it good or bad?

I think in the course of reading the article many people have got a logical question: “Slippage - is that bad? Does this mean that my broker is cunning and doing something wrong with my account?”.

The answer is simple.

The presence of slip is good because there is a sign of the reality of the market. This confirms that you really are trading on the international market.

Typically, there is slippage at the ECN type accounts. That is the accounts that appear on the interbank market at least in part, depending on the size of your position.

If you see the slip, it is not bad and not good. It is normal.

Slippage can be on account of a market type, such as ECN, NDD, STP, but it can also be present in the Standart type accounts.

The presence of slippage is a normal situation that you can and should work with.

Why there is slippage?

Slippage - is the result of the market execution.

Market Execution - a queue of orders, requests for purchase and sale.

What happens when we place a buy order?

Let’s imagine the so-called “glass”.

You’re going to take a buy position. On the market, there is a following bid, 100 lots at the price of 1.3145. And at the price of 1.3146, there are 50 lots. And so on:

Let’s say we want to buy 2 lots at the price of 1.3150.

Click on the “Buy by Market” button. But since we are not alone, then for this position there may be a variety of applications, and these 30 lots can be very quickly snapped up by other buyers.

Thus, due to a high demand for this rate on the market, the lot wasn’t left for us. But the broker is telling us that it does not matter. We have a new price of 1.3151. And we can either agree to buy the lot at the new price or, if we have an order with market execution, it will be executed automatically.

Thus, we can take a position on a less profitable price for us, 1.3151, but it is worth remembering that if lots at this price are sold out just as fast, we will get another price offer, 1.3152, 1.3153 and so on.

Liquidity Problems

Such availability of supply and demand indicates the presence or absence of liquidity.

Therefore, Liquidity can be stated the first reason for the slip.

In this case, there are several options.

Imagine that the size of the order is greater than the upper layer of liquidity. Also possible is that there was very little liquidity, or you have asked for some very large order.

Your order is divided into parts and is sent to several broker liquidity suppliers. As a result, the trader receives a weighted average price, which can be worse or better than the asked price. In this situation, the order slips partially.

If the liquidity provider sends execution failure, then perhaps there is a delay, and your order was sent to some other liquidity provider. After some time the market offer in the desired price is gone. As a result, the presence of other prices and the corresponding broker refuse to execute your order.

Very often when the news release, there is a problem of liquidity and orders slip a lot.

Why does it happen? Many banks and institutions that act as liquidity providers, leave the market to protect themselves from sudden price spikes and potential losses. At the same time, spreads extend as brokers want to protect themselves from potential losses.

That is why during the release of major news traders have problems. Spreads are big, slippages are strong and it becomes much more difficult do gain.

Lack of liquidity is also the case when trading exotic currency pairs. For example, with the Turkish lyres, African rand, or Russian rubles.

Technical problems

There is another reason for slip - Technical problems.

These include network latency between your trading terminal and a server, aggregator and liquidity providers, as well as a banal reason - the poor internet.

In this regard, I would like to tell you about the fact that especially with the large Wall Street dealers renting buildings near the center, so the orders could reach the trading servers as quickly as possible while saving tiny fractions of a second.

For us, it will be quite enough to have a fast and stable internet connection.

How to deal with slippage?

At the beginning, I would like to say an important thought. Fighting slippage is not necessary, but you need to work with it.

First, we start with the Technical part. You need a good internet connection. Please note that wired connection is much better and more stable than Wi-Fi.

When starting to work in the terminal, we try to disable programs that use the network.

If you are some mega scalper, it is the most important for you. Close a variety of programs such as torrents, Viber, Skype, ICQ and the like. We need a good connection, or VPS-server location closer to your broker if you are trading with the help of expert advisors.

If you are not that mega scalper, it is sufficient to have a good and stable internet connection.

The second point worth noting when working with slip are Settings in MT4.

When you click on a new order window, it contains a parameter - “Enable maximum deviation from quoted price”:

You can select a maximum slip value in points, which will be allowed. The idea is that if the price differs by a larger amount than the set parameter, the order will not be executed.

Unfortunately, in practice, this does not always work. This is due to the technical characteristics of brokers’ servers and trading platform Metatrader 4.

You must understand that this setting does not always work the way we want it.

Similarly, slippage setting is configured also in advisors.

The third point – Using of limit pending orders.

As we know, there are several types of pending orders.

They are Buy stop/Sell stop and Buy limit/Sell limit. Recall that a pending order with a ‘Stop’ ending is set expecting a breakthrough and the activation of a pending order, while the order with a ‘Limit’ ending is set with a purpose of entering the market on a pullback at the best price. But there is a fundamental difference in the performance of Stop and Limit orders.

When placing orders, for example, Sell stop, it is actually only activated when the price reaches it.

And if we expose Buy or Sell limit by a price, the order is sent in advance to the market and it has more chance of being executed exactly at that price that we have indicated.

Thus, limit orders book for us a certain part of liquidity provided that you have an account with entrance to the interbank market.

Of course, even these orders may slip, but the likelihood of this is much less than the market and stop orders.

The fourth point - Trade on high timeframes.

If you are trading on the M5 timeframe, a 1 pips slippage is a lot for you, but if you are trading on a daily chart, the slippage in 5 points doesn’t make much difference for you.

Therefore you can deal with the problem, or you can simply eliminate it and make insignificant by going to a higher timeframe.

The fifth point - Do not trade on news.

I have repeatedly mentioned that there is a problem with liquidity, as a rule, when various news is released. They are economic data, speeches of politicians and so on.

Therefore, about half an hour before the news release and half an hour after the release, we try not to trade. This way we eliminate the problem of liquidity.

The sixth point - Change the type of account/broker.

Of course, you can replace your broker or change the type of your account, but to be honest, it is a pursuit of some impossible dream. And besides, it usually means shifting the responsibility for a loss to your good broker, execution, market makers, fate, and so on.

Therefore, you should approach to this point with common sense and a certain degree of skepticism. Because if you start to change brokers, account types, it may take a long time and nothing else, and, as a rule, it won’t lead to anything good.

Seventh place – Filter by Volatility.

Imagine that you love active trading market. Did you know that the average slippage during the news release is 10 pips? And your average gain on such transactions is 30 pips. It turns out that the slippage takes about 30% of your profits.

Let’s say you sell a part of the news, but you know that some news creates an average movement of 30 pips, while others give an average movement of 60 pips.

If you take the deal with the average movement of 60 pips, slippage will eat only 17%, not 30.

Thus, using the news only with high volatility, you can reduce your losses caused by slip.

Similarly, you know that the average slippage in an active market, but without the news, is 2 pips. In this case, you can only trade in those days, when volatility is increased in order to maximize profit and minimize losses caused by slip.

Conclusion

In conclusion, I would like to remind you that today we have found that slip is a sign of a real market trade with an appropriate orders entrance to the interbank market.

You shouldn’t deal with this, but to start working – it’s probably worth it. If you are trading at higher timeframes, the slip does not play a big role for you.

If you trade in small time frames, it is possible to take measures in order to reduce slippage:

1. Good internet, wired connection, turn off all needless programs consuming traffic.
2. Setting the MT4
3. The use of limit orders
4. Trading on higher timeframes
5. Do not trade news
6. Change the type of account/broker
7. Volatility Filter

It’s all I wanted to say. Thank you for your attention and see you soon!

Take care, Michael

ForexTraderPortal.com