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Beware the Impact of Slippage, Neglect Could Lead Straight to Margin Call!

Many traders fail to understand the impact of slippage, which can abruptly lead to a margin call. Let's explore various types of orders to address slippage. Many traders may not be familiar or even aware of how crucial it is to understand when and how slippage can affect their trading outcomes. Slippage occurs when an order is executed at a different price than the requested price. Let's delve deeper into this phenomenon and how to mitigate its impact.

Slippage: Friend or Foe?

While prices can change, it doesn't always mean we'll incur losses every time slippage occurs. Brokers collaborating with liquidity providers (ECN/STP) typically offer the next best price as long as liquidity is available. Two types of slippage that may occur are positive slippage and negative slippage.

  • Positive Slippage: For instance, you place a buy order for the EUR/USD pair at 1.1300. When the order is transmitted, the best bid price suddenly changes to 1.1290 (10 pips below the requested price), and your order is executed at a better price at 1.1290.
  • Negative Slippage: Similar to the previous example, but the best bid price suddenly changes to 1.1310 (10 pips above the request). The order will be executed at a worse price at 1.1310.

What Causes Slippage?

Slippage mainly occurs when market conditions are unbalanced, where trading volume and price demand between buyers and sellers differ significantly. For example, when releasing NFP (non-farm payroll) data, the market can become unbalanced due to swift reactions to the report.

How to Mitigate Slippage's Impact?

Although slippage cannot be entirely controlled, we can reduce its risk by employing several methods, including:

  • Limit Order: Use limit orders to open or close positions that are already profitable. Limit orders will only be executed at the requested price or better.
  • Market Order Deviation Range: Some brokers offer features to execute the requested price with a specified slippage tolerance. If we set a maximum deviation of 3 pips, the order will still be executed as long as slippage does not exceed 3 pips.

Traders are encouraged not to be confused or even panic when orders are executed far from the requested price. Understanding and implementing strategies to mitigate slippage's impact are vital for successful trading and avoiding sudden margin calls.


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