* Trading is risky. Your capital is at risk.
Navigating the world of trading can be complex, with various factors influencing the execution and outcome of your orders. Two critical concepts every trader should understand are slippage and market gaps. In this article, we will delve into the intricacies of slippage and market gaps, explaining what they are, why they occur, and how they can impact your trading activities.
What is a slippage?
Slippage is a situation where an order is executed at a price that's different from the requested price. This happens when the bid or asks price changes in the milliseconds between the time the trader requests to execute the market order and the time the order is executed.
Is slippage good or bad for a trader?
Slippages can be either positive or negative. While some traders favor a more stable trading experience, slippage isn't always negative, as there is also the possibility for your order to have positive slippage.
Positive slippage
Positive slippage happens when an order is executed at a better price than the requested price. Let's consider the following example.
A trader has requested you to open an order BUY USDJPY with an ASK price of 131.500. Owing to high market volatility, the market price changes rapidly and 131.500 becomes unavailable while it's being sent to the market for execution. The order is executed at the next available ASK price of 131.000, lower than the initial requested price.
As a result, the order has been executed with a positive slippage of 50 pips.
Negative slippage
Negative slippage happens when an order is executed at a higher price than the requested price.
A trader placed BUY limit for EURUSD at 1.12000 when the market ASK price is 1.13000. When the ASK price dropped to 1.12000, the BUY limit order is triggered and sent for execution. However, due to high market volatility, the price 1.12000 becomes unavailable and the next available price is 1.13000, so the market BUY order will be executed at 1.13000 (a less favourable price).
As such, the order has been executed with a negative slippage of 100 pips.
Overall, FXTM has more positive slippage cases than negative slippage ones.
What is a market gap?
A market gap is an empty space formed between two consecutive candles, indicating a sudden price break with no trading activity in between. In the forex market, gaps mostly occur over the weekend or public holidays as the market is closed.
Major or unexpected news announcements that happen while the market is closed, may result in the price moving significantly (either up or down) when the market reopens and trading resumes. This difference in price is then seen as a gap on the charts for the period of closure.
Market gaps can also take place over a shorter timeframe, even on a 1-minute chart or immediately after a major news announcement or important economic data release.
How can gaps affect your orders?
Market gaps can cause slippage, which may affect stop and limit orders. This means that orders may be executed at a price that is different to the requested price. (Remember that can be either positive or negative depending on the direction of the price movement.)
Market gaps that happen over the weekend or on public holidays present more risk to traders as the order might be closed at a price that is vastly different, or worse, than a pre-set Stop Loss (SL) price.
For example, let's say you opened SELL USDJPY at 117.200 on a Friday with a SL at 118.700. Over the weekend, while the market is closed, some unexpected news breaks. When the market reopens on Monday morning, there's a significant price surge and the first available price is 120.264. As such, the stop loss price of 118.700 is skipped and the order closes at 120.654, 156 pips higher (or worse) than the stop loss price.
Note: Limit and stop orders will always be executed based on the next available price when the requested price is not available. As a result, pending orders may also be executed with slippage. Read more about execution price guarantee.
