Understanding Market Gap and Slippage
The foreign exchange rate reveals valuable details about particular currencies a trader wishes to trade-in. Hence, all Forex traders always keep a close eye on the exchange rate shifts, as that determines their exit and entry points while trading. These price/exchange rate shifts are also known as market gaps and slippage. As a Forex trader, when one is aware of market gaps, it is plausible to make significant profits by predicting the possible short-term price direction. Such market gaps cause slippage, and it is imperative for a trader to know how this can affect their trade. Since slippage marks a difference between the actual and the expected price of a currency, it is a highly risky phenomenon in a volatile market. It becomes impossible to execute orders at the expected price, and the only way to mitigate the risk is by executing trades at the next best price, or by putting a stop limit to the order at a particular price.
What is the market gap in Forex trading?
Gaps, in general, are sharp price breaks, which can also be termed as a difference in the closing price of a currency and the lowered opening price of the currency the next day, involving no trade in between. These gaps are shown as intervals or empty spaces in between the price movements. It either occurs by moving up or pushing down in the Forex market and is termed as a Forex gap or market gap. They primarily occur over the weekend since the Forex market is open 24/7 every day and closes only on the weekends. Such gaps can occur due to various other reasons, like a major news announcement, a significant financial breakthrough, or an economic/global crisis. The breaks in the picture below (also shown by arrows) signify market gaps.
Why are market gaps important?
Gaps provide a rough sketch of the ongoing market sentiment. When the gaps rise, it means there are no traders who are willing to sell at that particular level of the gap. This implies a higher currency demand compared to the currency supply in the Forex market. In contrast, when gaps are down, it implies that no traders are eager to buy at that specific level of the gap. Gaps give a signal to the traders to stay out of the market. If there is a gap immediately before a trade’s entry, it is wise to cancel the trade to avoid price breaks.
How to mitigate the impact of gaps
Gap events cannot be avoided, no matter what. It is not a rare situation to see a currency pair close at a particular level and open at a substantially lower level. However, the impacts of gapping can be mitigated. A helpful strategy is to use stop-loss or limit orders as a protection system to minimise the effect.
What is Slippage in Forex?
Slippage in Forex is the difference between the trade’s expected price and the price at which the trade is finally executed. It can occur at any point in time but mainly occur during high volatility times. The Forex market is highly volatile during situations like a big news breakout, economical instability, political crises, or a social issue. The currency value deviates incredibly from its average price. In the Forex market, high volatility also occurs when there is a large order execution but isn’t enough volume to maintain the bid/ask spread. A large order execution occurs when a big buy or sell order gets completed, leading to a significant movement in the Forex market. The market price changes frequently, and slow execution due to any possible reason results in changed prices from when you open the position to when it is actually executed.
How does slippage work?
Once an order is executed, it is sold or purchased at the most favorable price offered by the exchange. This can either produce better results, less promising results, or results equal to the indented execution price. The difference between the final execution price and the intended execution price is called positive slippage, negative slippage, or no slippage, respectively.
- Positive Slippage: A positive slippage is when the bid price in short trade increases and the ask price in long trade decreases, implying a lesser gap between the price buyer is willing to pay is more than the price seller is willing to accept.
- Negative Slippage: A negative slippage is when the ask price increases in the long trade and bid price decreases in the short trade, implying a wider gap between the price the seller is willing to accept and the price the buyer is willing to pay.
- No slippage: As the term suggests, no slippage is the situation when there is no difference between the expected price of a currency and the actual price of the currency.
Slippages occur because of the delay between the trade’s order and the trade’s completion when market prices change quickly.
As you are now aware of Forex market gaps and slippages, you also must know that these are unavoidable circumstances. Sometimes, they benefit the trader, and other times, not so much. Blueberry Markets is a Forex trading platform for hassle-free, quick, and efficient foreign exchange transactions, providing you with a transparent and reliable source to trade your favorite currencies!
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