Slippage in Trading: What It Is, Why It Happens & How to Avoid It

Therefore, there are several risk management strategies when dealing with slippage. Slippage can happen in both market and limit orders, especially in a high-volatile market. However, in most cases, this is most common in market orders. As such, most traders recommend using pending orders as a way of reducing slippage. As traders, at times we forget what happens in the back-end when we execute trades. In reality, a lot happens behind the scenes because of the nature of the market.

Slippage can be either positive or negative

The reason for this is that when a market has low volatility, the price changes are more steady. With higher liquidity, there are also many market participants, which increases the likelihood of your orders being executed at the desired price. A limit order is a type of order instructing your broker to execute a position at a specific price more favourable to the current market price. This means the order will only be executed when the price reaches your specified price or a better price.

Indeed, most day traders, and even investors go through it every day. It happens when the price you expect is not the price you get. Volatility, low liquidity, or execution delays are the reasons behind it. It hits forex and crypto traders alike, but in different ways in each market. In forex, it’s best to trade major pairs like EUR/USD or GBP/USD.

Avoiding High Volatility Periods

The order book is a list of the number of assets being bid on or offered at each price level. Otherwise, you could also use a market order to execute the trade instantly to ensure your order is filled, although this order type is more susceptible to slippage. As mentioned above, major news announcements or economic events could cause prices to fluctuate while increasing the levels of volatility.

• An issue you often find with traders is that they face slippage from time to time – a value that is quite important to know about in the context of trade.
• “Price slippage,” often referred to as “slippage,” is an unavoidable hazard of the financial markets.
• Volatility, low liquidity, or execution delays are the reasons behind it.
• In light of this, it is better to use a stop-loss market order to ensure the loss doesn’t get any bigger than it already is, even if it means incurring some slippage.

Slippage and risk management

While these numbers might seem small, in reality, the impact of slippage in trading could be significant. As explained above, this is a situation where an order is executed at a different price from where you placed it. For forex, the difference could be just a few pips while in stocks and other assets, it could be significantly higher.

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• In most cases, swing traders and investors rarely care about this lag since they focus on holding trades for several days and months.
• Because of how the market is, these transactions usually happen in microseconds.
• The faster your broker can process your order and route it to the market or their liquidity providers, the less time there is for the price to change significantly.
• Equities, or stocks, can also be affected by slippage, particularly with less popular stocks that have lower trading volumes.

This may involve modifying entry points, adjusting stop-loss levels, or selecting different brokers to reduce the occurrence of slippage. News events such as earnings reports, central bank announcements, geopolitical developments, and economic data releases can significantly impact market conditions. These events can lead to sudden and unpredictable price movements, increasing the likelihood of slippage. Traders should be aware of upcoming news events and adjust their trading strategies accordingly to minimize the risk of slippage. Slippage is the difference between the price at which a trader intends to execute a trade and the price at which the trade is actually executed. For instance, if a trader wants to buy an asset at $100, but the order is filled at $101, the slippage is $1.

A limit order, however, will execute only at a specific price or better, reducing negative slippage. Slippage occurs most frequently when there is high market volatility or when there are insufficient buyers or sellers to carry out your order at the price you desire. Therefore, knowing why slippage occurs and how to minimize its impact can spare you unnecessary loss. Finally, a version of the document can help you avoid slippage.

By understanding slippage and how to mitigate its effects, traders can make more informed decisions and enhance their trading performance. By staying ahead of market trends and events, traders can adjust their trading strategies accordingly, reducing the likelihood of slippage affecting their trades. By carefully managing their risk exposure and diversifying their portfolios, traders can protect themselves against unexpected price movements that may lead to significant slippage. Effective risk management is essential in controlling the impact of slippage on trading outcomes. Traders can utilize techniques such as position sizing, stop-loss orders, and diversification to limit the potential losses resulting from slippage. Algorithmic trading can help reduce the time it takes to enter or exit a trade, minimizing the potential for slippage.

Join over 42,000 traders and get FREE access to 17 lessons and 5 hours of on-demand video based on the famous ‘Market Wizards’. Join over 42,000 traders and get FREE access to 17+ lessons and five hours of on-demand video based on the famous ‘Market Wizards’. If you like this article then sign-up for our newsletter or join over 42,000 traders and get The Advanced Forex Course for Smart Traders 2.0. Factoring slippage into your trading plan is essential to protect your trading capital.

Big positions can move the market price because they soak up the liquidity in the market. For instance, selling 1,000 shares of a low-liquidity stock may lead to big slippage. This is particularly so in cases of major news or market openings. If the market is live, your trade might be executed at a price other than anticipated. Slippage can be positive (to the trader) or negative (to the trader), depending on whether the execution price is superior or inferior to expected. Slippage in trading refers to the situation where the price you expect to sell or buy an asset at is different from the price at which your order is executed.

If you don’t understand how slippage works, you’re basically handing the market free money without realizing it. And if you think it’s “just a few cents,” think again—over time, those extra costs stack up fast. A second later, you check your actual execution price—$100.50, which is different from the actual price you anticipated.

Behind every blog post lies the combined experience of the people working at TIOmarkets. We are a team of dedicated industry professionals and financial markets enthusiasts committed to providing you with trading education and financial markets commentary. Our goal is to help empower you with the knowledge you need to trade in how to avoid slippage in trading the markets effectively. Staying informed about market conditions and upcoming events that could impact price movements is crucial in managing slippage. Traders should regularly monitor economic calendars, news releases, and geopolitical developments to anticipate potential market volatility. Many trading platforms offer tools and features designed to protect against slippage.

Why does slippage get worse during news events?

You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. EToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Slippage is important, and needs to be managed, but also needs to be put into perspective. Matching the market you trade to your ultimate aims is more important.

By the time your market order arrived at the Exchange, the stock had soared on the news to $12.15. Unfortunately for you, your buy market order gets filled at $12.15 – a 15-cent slippage. To refresh your memory, if you’re placing a market order, you tell your broker to buy or sell the stock for you immediately at any price.

Below are examples of cross pairs known for their higher volatility. Cross pairs can have higher volatility and wider spreads, especially during periods of market turbulence. These pairs typically have lower trading volumes compared to major pairs, increasing the likelihood of slippage. Minor pairs often have lower trading volume and can be more susceptible to slippage. Due to their lower liquidity, exotic pairs can have wider bid-ask spreads and more significant slippage. Below are specific examples of forex pairs that are more likely to experience slippage.