Real market conditions
True Forex Funds provides live execution model accounts beginning from Phase 1 to the funded program to ensure our trader’s preparedness for real returns. While trading on the evaluation program our traders can already experience how real markets function and gain access to more insights into the order book execution model.
Technically, when our Clients place their orders at a requested price on their MetaTrader platforms, their request is sent to our liquidity providers for processing and returning with the best available price for the order based on the current market conditions. During this time, if there is no available price at the order level the next best available price will come into effect, which is considered slippage.
Obviously, traders can experience no slippage on demo accounts – which they can open at any broker – but these are simulated environments, with no real investments and market functions. Therefore no real profits can be generated. We strive toward practical excellence and we deliver upon our trader’s demands and live market requirements, so we have implemented multiple liquidity providers for the live trading experience.
Although it can happen frequently in forex trading, slippage is sometimes misinterpreted. Understanding the causes of forex slippage can help traders reduce negative slippage while potentially maximizing positive slippage. This article helps you to explore the concept and mechanics of slippage in forex, as well as how traders can avoid them.
Slippage happens when a trade order is filled at a price different from the one that was requested. This typically happens when volatility is strong whereby orders cannot be matched at desired prices.
Although slippage is frequently viewed negatively in the forex market, it can really be advantageous for traders. Any fill price, whether it is higher or lower than the price asked, is used to fill forex trading orders when they are delivered to a liquidity provider or bank.
Let’s illustrate slippage with an example of buying EUR/USD at the current market rate of 1.01650. Three possible outcomes are examined in greater detail below when the order is filled.
- No Slippage: When the order is submitted, the best buy price that is being provided is 1.01650, which is exactly what we asked for. The order is then filled at 1.01650.
- Positive Slippage: The order is submitted and the best buy price that is being provided is changed to 1.01550 (10 pip below the requested price). The order is then filled at 1.01550.
- Negative Slippage: The order is placed, and the best buy price given immediately changes to 1.01700 (5 pip above our requested price), at which point the order is filled.
Although no slippage characteristics are represented on simulated accounts, the live execution model is the accurate way how an order is filled. Practically, when an order is placed on a trading platform, it moves from the trader’s local platform to the server, where one or more liquidity providers match the order with a quote and send a confirmation back to the trader’s platform from where the order was originally placed. The received price is taken from the best available price, which means that the liquidity provider executes the trade in accordance with the depth of the market for the selected instrument at the specified time, which is considered real market conditions.
Anytime we are filled at a price different from the price requested, it is called slippage, which is a normal market phenomenon, just like spreads, swaps or commissions.
Drivers of slippage and how to avoid it:
What causes forex slippage, and why can’t we fill our orders at the price we’ve asked for?
Everything comes down to the fundamental elements of what a real market is made up of: buyers and sellers.
There must be an equivalent number of sellers with the same price and trade size for each buyer at the same price and trade size. While liquidity can temporarily balance order fillings; it can largely vary across trading sessions, therefore prices fluctuate upwards or downwards whenever there is an imbalance between buyers and sellers.
While the forex market is one of the most liquid markets with more than a daily turnover of $6.6 trillion there must be always a counter trade for an order to be filled at the exact requested price.
In real market conditions, spreads tend to widen during times when volatility is high or liquidity is low and tighten when liquidity is high. It is critical to take it into consideration when trading since a buy position executes on the Ask price and closes on the Bid price and a sell trade opens vice versa. Stop Losses, Take Profits does not guarantee instant fill on the desired price as the widened spreads can cause slippage.
If we would attempt to buy 100,000 units of EUR/USD at 1.0165, but there are not enough sellers or no one is willing to sell at 1.0165, the buy order will need to look at the next best available price(s) where traders are willing to sell, which can be either higher or lower then requested. Forex slippage can also happen with regular stop losses when the stop loss level is not respected.
During market rollovers, liquidity is low and spreads may widen whereby slippage usually occurs. This happens because of a lack of liquidity across the globe since most banks and financial institutions are closed. On our servers, the rollover time is 22:00 (GMT+0).
Slippage can be also observed during main macroeconomic news events and releases.
When the market gaps, spreads may widen and there is a high possibility that the order will receive slippage; stop losses or take profits may be triggered and will execute at the next best available price.
The more liquid currency pairs, such as the Majors like EUR/USD and USD/JPY, will be less prone to slippage in typical market conditions. Although even these liquid currency pairs can be vulnerable to slippage when markets are volatile, such as in the above-mentioned ways.
News and releases have a significant impact on volatility.
Exotic and minor forex pairs are less traded, therefore not as many buyers and sellers are looking for opportunities on them then Major pairs. Slippage should be taken into consideration relatively.
In this article, we have introduced the market phenomenon called slippage which is a usual occurrence in real markets. Our object was to go through the basics and circumstances of slippage. The drivers of slippage can be taken into consideration before planning a trade. At True Forex Funds, all accounts receive live execution models to bring the most transparent way of proprietary trading to build good trading habits that reward our traders with real returns.