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Slippage & related strategies

1. What is slippage?

In forex trading, slippage refers to the difference between the specified price of an order and the price at which the order is executed. Slippage is common in forex trading. It can be categorized as positive slippage and negative slippage. Take a buy market order as an example: 

Assume that the market ask price of EURUSD is 1.02100. If an investor places a market order at the ask price of 1.02100 to buy the currency pair, the order will be executed at the next available market price. The difference between the final execution price and the specified price can be classified into 3 different types of slippage as follows.

● No slippage: The next available ask price is equal to the specified price, so the order is filled at 1.02100.

● Positive slippage: favorable price change: The next available ask price is 1.02085 and the order is filled at 1.02085. The ask price is 1.5 pips lower than the specified price, so a positive slippage occurs.

● Negative slippage: unfavorable price change: The next available ask price is 1.02155 and the order is filled at 1.02155. The ask price is 5.5 pips higher than the specified price, so a negative slippage occurs.

 

2. Slippage-related strategies

Futu adopts the straight-through processing (STP) for all orders from its clients. It means that all the client orders will be submitted to and filled with the liquidity providers before they are filled with clients and execution prices are determined. Here are the slippage-related strategies:

● Limit orders & stop limit orders: Orders are executed at the specified price or better price so that no negative slippage will occur.

● Market orders & stop orders: Orders are executed at the market price, so positive or negative slippage may occur. Clients can benefit from the favorable price change brought by the positive slippage, but may also suffer the unfavorable price change caused by the negative slippage.

 

3. Explanations & Notes

3.1 Due to rapid price changes, the delay between the specified price and the execution price of an order may lead to slippage. There are many reasons for such delay, including but not limited to network latency, lack of available liquidity, and large orders.

3.2 During market volatility, such as news events, it is also difficult for orders to be executed at the market price, given that the market price may have deviated substantially from the specified price. Orders (market orders) can only be filled at the next available market price.