How to avoid slippage
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Slippage is simply the difference in pips between the order price and the execution price for a particular trade.
Slippage is a problem in all financial markets. And in the forex where traders enjoy fairly small profits on the average trade, slippage could wipe off all the gains you make for one day; this is dangerous.
A trader is said to have suffered from a slippage in forex when the market price moves against the trader during the small time interval between when he enters an order and the time the order is executed. Slippages arise due to problems from network speed and market volatility.
Slippages occur when a trader places a market order. Such orders authorize the broker to sell or buy a currency pair at the prevailing market price. So now let us take a practical example: the GBP/USD is trading at 1.55 and I am okay with the current market price and then I place a market buy order. If I have $155 in my account then I could get 100 GBP at this current price. Now after I had placed an order at 1.55, prices move to 1.56, my broker could still fill my order (since it is a market order and he has the authority to fill it at prevailing prices). If this happens, I wouldn't be able to buy the supposed 100 GBP again with the $155 I have in my account, I would have to pay more for the 100GBP if I have more than $155 in my account. This price change which had caused the different transaction price than the one I saw on my screen when I placed the order is called a slippage.
Let us take another example to make it much clearer using the MT4 platform. Now you ordered to BUY 1 lot of EURUSD at 1.35050 which happens to be the prevailing market price. The order is sent out through MT4 to your broker and then the confirmation message comes back informing you that the order was executed at 1.35055.
Slippage: 1.35050 - 1.35055 = -0.00005=-0.5 pip EURUSD = -5 USD
You can avoid slippage by using limit orders. The trader can prevent slippage from occurring by specifying the highest price he is comfortable buying or the lowest price you are willing to accept in sale.
With your limit order, you can choose a price like no more than 1.54 for the case of the GBP/USD in the first example and your order will only be executed when the market price for the GBP/USD decline to 1.54. The risk is just that your transaction may never be executed. But then your trades wouldn't be executed at new ( even worse) market prices otherwise caused by slippage. This is what slippage is and how you can avoid it in the forex.