A Guide to Understanding Forex Market Gaps and Slippage While Trading

The foreign exchange rate provides important information about certain currencies that a trader is interested in trading. As a result, all Forex traders constantly monitor changes in the exchange rate since these changes help them decide when to enter and leave a trade.

What is the market gap?

Every trader has a different level of risk tolerance. With no trading taking place in between, gaps are sudden price changes. Both traveling up and down might cause gaps.

Due to the fact that the forex market is closed solely on weekends, gaps tend to occur there. Gaps can also occur on extremely brief timescales, such as a one-minute chart or right after a significant piece of news.

As a forex trader, I faced this kind of issue. By the way, when I traded with AssetsFX as a trader, they provided all rules, conditions, and guidance prior to the trade.

Gaps can occur, for example:

• When economic data is given, mainly when it includes information that the market wasn't anticipating

• As significant news events, especially those that are unexpected or global, are reported

• when trading restarts following a weekend or holiday, mainly if significant news is released during that time

Why are gaps important?

The sentiment of the market can be inferred from gaps. A market that gaps up indicates that no traders were willing to sell at the gap levels. When a market gap is down, it indicates that no traders are eager to buy at the gap levels. Additionally, they should be understood because it is possible to gap beyond a stop order and receive a fill at a worse price than your stop order.

Gaps may lead to price behavior that is corrective. In other words, prices typically turn around and "fill" the gap after it appears.

Benefits of Gap

• By doing so, it confirms that the project's requirements have been satisfied.

• It provides insight into the areas that need improvement, such as the products, effectiveness, and procedures, as well as profitability, performance, and customer satisfaction.

• It aids in identifying the areas with limitations and shortcomings so that those areas can be strengthened.

• It assists in identifying how perception and reality differ.

• It assists in choosing where to allocate resources and energy.

• It offers information to help one make a better choice, which also aids in raising performance.

• If gap analysis is done correctly, the results can be understood clearly and quickly.

Drawbacks of Gap

• However, gap analyses reveal specific issues' root causes. However, if it goes further, the trustworthy source of the issue can go undiscovered, and many complexities hidden behind them might go unnoticed.

• The perseverance and expertise of those involved in the gap analysis process are crucial to the process's success.

• Since the basis changes regularly, especially in large companies, there is a considerable likelihood that the analysis' findings may need to be corrected.

What is slippage?

The term "slippage" describes the discrepancy between the price at which a trade is executed and the expected price. Slippage can occur at any time, although it is particularly common when market orders are employed during times of greater volatility.

It can also occur when a large order is placed, but there is an insufficient volume at the selected price to keep the bid/ask spread at its present level.

Assume a purchase order is sent. There are three potential results:

• No slippage: The trader purchases the asset at the anticipated price

• Positive slippage: Positive slippage occurs when a price drops immediately before an order is placed, resulting in a lower price than anticipated.

• Negative slippage: Negative slippage occurs when they spend more than they anticipated because the price increased immediately before they placed their order.

Example of Slippage

The bid/ask spread changing suddenly is one of the more frequent causes of slippage. When this occurs, a market order may be executed at a different price than what was initially intended. When there is negative slippage, the ask in a long trade has climbed, or the bid in a short trade has declined.

In a long trade, the ask has lowered, while in a short trade, the bid has climbed. This is known as positive slippage. Limit orders and avoiding market orders are two ways that market players might guard against slippage.

Let's use Apple as an example. The broker interface might display Apple's bid and ask prices as $183.50/$183.53. A market order is placed for 100 shares, with the hope that it will be completed at $183.53.

Before the order is filled, however, microsecond trades made by artificial programs increase the bid/ask spread to $183.54/$183.57. The order is then filled at $183.57, resulting in negative slippage of $0.04 per share, or $4.00 per 100 shares.

Why does slippage occur?

You now understand what slippage means. Why does it, however, occur? Slippage may seem like a simple mistake. But this is undoubtedly untrue. In excessively turbulent markets, slippage occurs. This means that it is impossible to request a trade at a given price and have it done at that time since the prices of the items being traded fluctuate so often.

In volatile markets, price changes can occur so quickly that, by the time you place your order, the price may have changed by a few points either way. As a result, the order is really completed at a different price than you anticipated.

In periods of limited market liquidity, slippage can also occur. As a result, there are few people on the market. Therefore, it may be challenging to locate a buyer willing to buy the stocks or other assets you're selling at the price you want. Similarly to this, it can be not easy to find a seller who will accept your offer to purchase their asset.

How can slippage be prevented in trading?

• Keep in mind that not every slippage is harmful. Additionally, it might lead to some orders having more affordable prices. Here are several strategies for reducing slippage in trading, though.

• Orders for guaranteed stop losses. These are wonderful approaches to ensure that slippage does not cause you to lose more than you anticipated. In volatile situations or with volatile assets, this sort of command is most frequently employed.

• Limit order. An order with boundary parameters is one that will only be filled exactly at or within a defined range of a certain price.

• Trading with a broker who offers lightning-fast execution. Less slippage will occur the faster the procedure is from when the order is placed to when it reaches the market. The price has more time to move if the execution pace is sluggish, which increases the possibility of slippage. Our execution has been getting better all the time, and now it takes just 4.5 milliseconds on average.

• Trading in markets with lower volatility. The likelihood of slippage is typically higher for volatile assets because of their rapid price changes. Slippage is typically lower in less volatile markets and environments.

• Markets with high liquidity. Stocks and other assets with high volume (high liquidity) typically experience less slippage than assets with low volume. Small-volume assets typically have wider bid/ask spreads. Slippage may occur if the bid or ask changes while an order is being processed since the next bid/ask price may be some distance away.

• When the market is erratic, stay away from trading. When trading forex, news events can result in abrupt price movements and gaps, such as earnings announcements for equities or economic data releases.

Last Words

Now that you are aware of Forex market gaps and slippages, you must also understand that these are unavoidable situations. They occasionally help the trader, and occasionally they don't. You may trade your preferred currencies with confidence and transparency thanks to Blueberry Markets, a Forex trading platform for hassle-free, rapid, and efficient foreign exchange transactions.