How to reduce expenses in Forex trading

Negative vs positive slippage

As in the case of swaps, slippage also has a positive version. If your trading position is realized at a more favorable price leading you to earn slightly more, that’s a positive slippage. For the negative, it is just the opposite.
 

How is slippage affected by the quality of the broker

Forex trading takes place online, that’s why a very important indicator of a broker’s quality is the so-called trading infrastructure. It encapsulates, what technologies the broker uses, how good his business servers and liquidity providers are. In short, how fast the broker is able to get your trading order to the interbank market and how good a counterparty it is able to connect it to. In essence, the better the broker, the less chance of negative slippage (there are exceptions in the form of trading slippage during extreme market fluctuations, but we will omit these for this case).

Letting traders experience positive slips is one of the indicators of the broker's quality

How slips affect a broker model

• STP a
• MM (Market Maker)

The broker based on the STP model is just an intermediary between your order and its match on the real (interbank) market. The quality of an STP broker is determined (in addition to its trading infrastructure) also by its liquidity provider. That is the intermediaries to which the broker sends your orders for pairing. Thus, a broker operating on the STP model cannot intentionally affect the slip. However, the quality of its services can match you with a certain counterparty so quickly that slippage occurs in a really small percentage of cases and sometimes the slippage ends up being positive.

On the other hand, a broker based on the MM model usually does not send your orders to the interbank market and takes up the role of the necessary counterparty himself. Therefore, theoretically, he has the opportunity to determine with what degree of response orders will be processed, and thus whether they will slip or not. Although nowadays Forex brokers are often subject to strict regulations, similar cases have occurred in the past.
 

Positive slippage and its effect on trading expenses

Enough theory, let's give one practical example for all:

If the broker enables you to trade the EUR / GBP currency pair for 1 pip. (ie 1 lot EUR / GBP for 10 EUR), it can still be only half the truth. That's because of the slippage that the broker didn't mention.

Suppose that each of your inputs and outputs is affected by a slip of 0.5 pips (each of the trade inputs and outputs is realized with a price of fewer than 0.5 pips). As a result, it makes a total of 10 EUR for 1 standard lot of EUR / GBP. This is money that is "lost" due to a negative slippage.
 

Let's extrapolate this result to the year-long trading activity and compare the result of trading without slips and with slips:

With slip
2 realized lots per day x 20 EUR / 1 lot (slippage for each transaction) x 260 days = 10,400 EUR
 

Difference: 5200 EUR
 

This is, of course, an extreme example. In reality, it will never happen to you that slippage will occur in each of your trades. Normally, both negative and positive slippage occurs, but the extent to which they occur (and whether they are positive) is what determines the quality of the broker. We, therefore, recommend that you pay attention to this attribute, whether you already trade with a broker or you are in the middle of choosing one.

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