Once you order a trade in the market, you would be assuming that it will open or close at a certain price as you see on your monitor. Nevertheless, there are instances when the trade may be carried out at a slightly varied price. This variation is referred to as slippage.
Slippage refers to a typical aspect of trading in such markets as forex, crypto, and stocks. This is because prices in financial markets change very fast particularly during active periods.
The awareness of the slippage will assist traders to deal with expectations and enhance their trading strategies.
What Is Slippage?
Slippage is the disparity in price that you anticipate when making a trade, and the actual price that the trade will be made.
Simply put the market might shift even before your order has been completely executed.
Example
You would like to sell EUR/USD at 1.1000.
However, by the time your order is carried out, the price has gone to 1.1002.
A slippage of 2 pips is referred to as difference.
Types of Slippage
Slippage is not necessarily bad. It can happen in two ways.
Negative Slippage
It occurs when the trade is undertaken at a disadvantageous price against what was projected.
Example:
- Expected price: 1.2000
- Execution price: 1.2003
When you are selling, you are getting a lower price and when you are buying, you are paying a slightly higher price.
Positive Slippage
This is achieved whereby the trade is carried out at a superior price than anticipated.
Example:
- Expected price: 1.2000
- Execution price: 1.1998
The trader is the beneficiary of the price difference in this case.
Why Slippage Happens
Slip in trading occurs due to a number of reasons.
1. High Market Volatility
Prices are subject to change within a short time, especially during key news stories or unexpected market fluctuations. Orders can be filled at the closest possible price.
2. Low Liquidity
In case of inadequate buyers/sellers at a particular price, your order can be fulfilled to the closest possible price.
3. Large Order Size
It can lead to slippage when very big trades fail to be filled at a certain price.
4. Fast Market Conditions
The prices in high-speed markets can vary several times in a fraction of a second.
When Slippage Occurrence is most frequent.
The slippage is usually observed in traders when:
- Key releases of economic news.
- Market openings
- High volatility periods
- Low liquidity trading hours
As a case in point, when economic matters such as interest rate announcements or inflation are disclosed, the market tends to slip.
How to Reduce Slippage
Slippage is not the one that can never occur but traders could minimize the risks of its occurrence.
Some helpful tips include:
✔ Trade high liquidity sessions (London and New York sessions)
✔ Do not trade at times of big news.
✔ When limit orders are available, use them in place of market orders.
✔ Select a trusted broker that is fast acting.
The following measures can be used to enhance trade execution.
Final Thoughts
Slippage is a usual occurrence in the process of trading and occurs when the market is moving at a faster rate compared to how the orders are being executed.
Although it has the ability of sometimes playing in your favor, it may also lead to the rising trading costs unless handled with care.
Effective traders know that slippage is an inherent aspect of real market conditions and they concentrate on good timing, correct types of orders and risk management to reduce the effects of slippage.
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