The slippage is a difference between the price level we ask and the level we get during the execution of your trade. These differences are inevitable due to continuously changing market and will occur at the times of strong instability, for instance, due to important economic news or when the active trading hours of forex sessions overlap. The slippage can also occur if the broker with floating spreads suddenly changes it.
It is very common in forex trading, moreover , many trading system have been tested without including this phenomenon into the algorithm. Consequently, when the algorithm is back tested it appears to be a winning whereas in reality it would have been losing money.
Suppose you open a long position on 100K with the asking price is 1.4520. You click the mouse and order has been sent. However, by the above mentioned reasons the execution has slipped to 1.4530 (10 pips). 10 pips might sound negligible but you just have lost $100. Ten trades like this and you loss is 1K.
There is another side of the coin. The slippage may result in a better closing price. Although you follow your prescribed exit strategy, you may actually exit the market using a delayed take-profit order. The position will be closed at a better price, which is say 10 pips better than you have originally planned, that case you get an unexpected profit of about $100.
How to protect yourself against the slippage? Some providers guarantee the forex traders their stop loss orders. It means that the prescribed level will be the fill level regardless of how much the market gaps through the level. However, this service costs a certain premium and must be at a certain distance from current market levels.
However, the most common defense is trading experience and familiarity with the forex patterns and signs of the unpredictable movements of the forex market. During these times it is not recommended to place the orders unless you are ready to risk your investments.
You also should be looking for brokers with advanced online systems which connect the traders straight to the market providing the real quotes and prices.
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