What Does Slippage Mean in a Forex EA?

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An EA, or expert advisor, is automated trading software that an investor can use to make trades. Currency prices fluctuate very quickly, so the expert advisor's order may be received by the forex broker after the price has already changed. When the forex broker receives the order, it will fill the order at the new price, not the price that the advisor requested, producing price slippage.

Time Frame

  • Slippage usually occurs over a period of a few seconds, at most. For example, the dollar may be worth 82.20 yen one second, and 82.21 yen the next. If the trader purchases yen and holds the yen for a year, the change in the dollar-yen exchange rate for the year is likely to be much larger than the price slippage. The dollar might be worth 90 yen at the beginning of the year and 80 yen at the end, so buying back dollars at a rate of 80.01 yen isn't a big difference.

Market Events

  • A small amount of price slippage is normal at all times. If an unexpected situation comes about, such as a downgrade in a country's credit rating or a tidal wave, many traders will attempt to trade a nation's currency at the same time. There may be no currency traders who are willing to purchase one currency for a short time, leading to a large price gap and a sizable amount of price slippage. If Japan's majority party loses an election, the dollar-yen exchange rate may change from 82.20 yen to 82.70 yen in a single second. Because the expert advisor can operate without direct control by the trader, it may continue to make trades during a period of high price slippage.

Considerations

  • If an investor expects price slippage, he should adjust the expert advisor settings to use a strategy that involves less frequent, longer-term trades. A short-term currency trading strategy may produce a profit when the investor tests it against historical exchange rates with the expert advisor, and produce a loss when the expert advisor actually trades with the strategy, because of the effect of price slippage.

Penalties

  • A forex broker can be penalized if high levels of price slippage occur. If the forex broker cannot provide a good reason for the occurrence of price slippage, the Commodity Futures Trading Commission may decide that the slippage was fraudulent, and order the forex broker to return the difference in currency prices to the investor.

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