Understanding Slippage (Slipage) in Forex and Crypto

Every trader who has been active in the forex or crypto market will at least once run into slippage, that is, the difference between the price they intended for opening or closing a trade and the price at which it was ultimately executed. This phenomenon is called price slippage, and it is one of those concepts that, when properly understood, can affect the outcome of your trades. In this article, we take a full look at what slippage is, why it happens, what types it has and how it can be managed.

 

What Is Slippage?

Slippage in financial markets refers to the difference between the price a trader requests for executing their order and the price at which the order is actually filled. Put more simply, when we click the Buy or Sell button, the market price may change between the time the order is placed and the time it is executed on the broker's or exchange's server. This time gap means the final executed price may not be the same as the price we saw on the screen.

Now that we understand what slippage means, it should be noted that in markets where volatility is fast, several price changes can generally occur between the trader's request and the server's response. This gap naturally exists, especially in volatile or thin market conditions, and is an inseparable part of online trading.

 

Differences in Slippage Between the Forex and Crypto Markets

Although the concept of slippage is the same in forex and crypto, its severity and extent differ between these two markets. In the forex market, slippage usually occurs during the release of major economic news or during low-volume trading hours (such as the Asian session), and brokers generally have advanced order execution systems to reduce it.

Meanwhile,  in the crypto market, especially on decentralized exchanges (DEX) such as Uniswap or PancakeSwap, slippage is a more common phenomenon. For example, slippage on Uniswap and slippage on PancakeSwap happen because of the nature of liquidity pools, which are responsible for providing liquidity for trades on decentralized exchanges. In other words, the larger the trade size relative to the depth of the liquidity pool, the higher the likelihood of slippage.

 

Causes of Slippage in Trading

To manage slippage in trading properly, you first need to understand the main causes behind it. There are various reasons for slippage, and below we point out three key factors that lead to price slippage.

 

Sharp Market Volatility During Economic News Releases

When important economic data such as interest rates, US Federal Reserve news, inflation or employment figures are released, order volume suddenly surges within a fraction of a second. In these moments, prices jump, and the gap between placing and executing an order can lead to slippage.

 

Lack of Liquidity in Certain Currency Pairs or Tokens

Low liquidity means the volume of buy and sell orders is limited; in thinly traded forex pairs, quiet sessions such as the Australian session, or low-volume cryptocurrencies, there may not be enough liquidity at the moment of placing an order to fill it at the requested price. For this reason, trading major currency pairs or high-volume cryptocurrencies usually involves less slippage.

 

Slow Order Execution and Platform Technical Issues

Sometimes slippage is rooted in technical issues on the platform side rather than necessarily in market conditions. Delays in order execution servers, server ping, poor connections and internet disruptions, or the weak infrastructure of a broker or exchange can cause an order to be processed with a delay, and the price may change in the meantime.

 

Types of Slippage in Trading

Slippage should not necessarily be considered a negative thing, and it does not always work against the trader. Depending on the direction of the price change, price slippage is divided into two types, positive and negative, and below we will look at the nature of these two types of slippage.

 

Positive Slippage

Positive slippage occurs when an order is executed at a better price than the one requested. In other words, a buy order is filled at a lower price, and a sell order at a higher price, than the requested price. So in this case, slippage works in the trader's favor.

 

Negative Slippage

Negative slippage is the exact opposite of positive slippage and occurs when an order is executed at a price away from the requested price; that is, a buy is filled at a higher price and a sell at a lower price than expected. Negative slippage can directly increase losses in trades, especially in strategies where a tight stop loss has been set or where trade volume is high.

 

How to Manage Slippage in Forex and Crypto

Given the points discussed above, although eliminating slippage completely is almost impossible, we can prevent the damage caused by negative slippage using a few methods, some tips on which are outlined below.

 

Setting a Slippage Tolerance

To explain setting a slippage tolerance, we first need to know what slippage tolerance is. This setting, mostly seen on decentralized crypto exchanges, allows traders to specify the maximum allowed slippage in advance. If price slippage exceeds this limit, the transaction is automatically canceled. Some traders aim for zero or near-zero slippage, but we should note that setting slippage too low may cause transactions to fail in volatile markets.

 

Using Limit Orders Instead of Market Orders

Market orders are generally executed at the current price, since they trade directly at the market price. That is why they are prone to slippage. Limit orders, on the other hand, let us set our desired price, and if the market does not reach that price, the trade will not be executed. Using Limit orders is one of the effective ways to control price slippage; although the order may sometimes not be executed at all.

 

Choosing Brokers with High Liquidity and Fast Execution

One of the questions on our minds is which broker has less slippage. This usually comes down to the broker's technical infrastructure and liquidity sources. That is, brokers connected to multiple liquidity providers and with fast order execution servers produce less slippage. That is why we recommend finding a broker with no or low slippage through reputable global review websites as well as by checking user reviews.

 

Avoiding Trading During Sharp Volatility and Major News

It may be simple advice, but by avoiding entering a trade exactly at the time major economic news is released or during moments of sharp market volatility, we can stay safe from the damage of slippage. Many professional traders prefer to enter trades after the news is released, once the market has calmed down.

 

Does Slippage Exist with All Brokers?

Yes. Slippage exists to some extent with all brokers and exchanges, depending on market conditions. The reason is that this phenomenon stems from the nature of financial markets and the natural time gap between placing and executing an order. However, its severity varies across brokers. It could be said that the best broker without slippage is actually a broker that has reduced this slippage to the minimum possible, not one that has eliminated it completely. Therefore, some brokers' advertising of «zero slippage» should be examined with greater caution.

 

What Is the Difference Between Slippage and Spread?

One of the questions that puzzles many novice traders is the difference between spread and slippage. The spread is the difference between the buy price (Ask) and the sell price (Bid) of an asset, which always exists at the moment of trading and makes up part of the trading cost. Slippage, however, is the difference between the price the trader intended in the order and the price executed in the market, and it does not always occur. In other words, the spread is predictable and known in advance (fixed or floating), while slippage is unpredictable and variable. The difference between slippage and spread can also be summarized as follows.

 

What Is a Hidden Spread?

A hidden spread refers to a situation where, instead of displaying the spread transparently, the broker conceals it in the prices shown to the client or, by slightly manipulating rates, charges the trader an extra cost without this cost being transparently visible on the platform. Therefore, a price that works against the trader may sometimes not be due to price slippage, but rather due to a hidden spread applied by some brokers. This is mostly seen with non-transparent or unregulated brokers and is one of the reasons why choosing a reputable broker with an official license is so important. 

To explain further, many beginner traders attribute any price difference in their trades to natural market slippage; however, in many cases this difference stems from a broker's non-transparent practices. Unreliable brokers, unregulated brokers (without legal oversight), or brokers with very weak regulation usually use the following 3 methods to make hidden profits from traders' accounts:

• Hidden mark-up (Mark-up): Instead of showing the real market price, the broker shifts the buy and sell prices a few pips against the trader and hides the resulting extra cost within the final price.

• Requote or order rejection (Requote): The platform deliberately refuses to accept the trader's order at the requested price and, by creating a delay, forces them to enter the trade at a worse price.

• Artificial delay (Artificial Latency): Deliberately delaying the broker's servers for a few seconds so that the market price moves and the trader faces fake negative slippage.

 

How can you tell if a broker is deliberately causing slippage?

Although natural slippage is part of trading, some untrustworthy brokers may abuse this phenomenon to their own advantage. A few signs can help you detect deliberate slippage:

• If negative slippage occurs repeatedly and in almost all of your trades, it can be a sign of negative slippage and even a hidden spread. This asymmetry can be a sign of manipulation.
• If price slippage only occurs when a trade is profitable, it can be a sign of deliberate, fake slippage.
• Unusual delays in order execution, especially at times when the market is calm and has no particular volatility, or when there is no clear technical reason for the delay, are an important sign of deliberate slippage.

For greater certainty, we recommend that you always review the broker's legal documents, including the client agreement and its regulations, and if possible, before trading for real with the broker, test the broker's costs and trade execution method on its trading platforms through a demo account.