What is Slippage
Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed. Slippage often occurs during periods of higher volatility when market orders are used, and also when large orders are executed when there may not be enough interest at the desired price level to maintain the expected price of trade.
BREAKING DOWN Slippage
Slippage happens when a trader gets a different rate than expected between the time he enters the trade and the time the trade is made. It is something that can happen to any trader, whether he's trading stocks, currencies or futures.
The Basics of Slippage
Slippage does not directly refer to a negative or positive movement, as any change between the expected and actual prices can qualify. When orders are executed, the corresponding securities are purchased or sold at the most favorable price available. This can cause an order to produce results that are more favorable, equal to or less favorable than original expectations with the results being referred to as positive slippage, no slippage and negative slippage, respectively.
As market prices can change swiftly, slippage occurs during the delay between a trade being ordered and when it is completed. Slippage is a term used in both forex and stock trading, and although the definition is the same for both, slippage occurs in different situations for each of these types of trading.
In forex, slippage occurs when an order is executed, often without a limit order, or a stop loss occurs at a less favorable rate than originally set in the order. Slippage is more likely to occur when volatility is high, perhaps due to news events, resulting in an order being impossible to execute at the desired price. In this situation, most forex dealers execute the trade at the next best price unless the presence of a limit order ceases the trade at a preset price point.
While a limit order can prevent negative slippage, it carries with it the inherent risk of the trade not being fully executed if the price does not return to a favorable amount. This risk increases in situations where market fluctuations occur more swiftly and significantly limit the amount of time for a trade to be completed at an acceptable price.
Stock Trading Slippage
Slippage in the trading of stocks often occurs when there is a change in spread. In this situation, a market order placed by the trader may get executed at a less favorable price than originally expected. In the case of a long trade, the ask may have increased. In the case of a short trade, the bid may have lowered. Traders can help to protect themselves from slippage by avoiding market orders when not necessary.
Can You Avoid Slippage?
While you can't always avoid this spread between your entry and exit points, there are times when you can miss big slippage points. It's easy to time your activity around certain major events, even if some breaking news happens that just can't be predicted.
You can expect to see the most amount of slippage when major events are taking place. So if you're a day trader, you may want to reconsider doing any big trades on days there is news coming out of earnings season or when the Federal Market Opening Committee (FOMC) is making an announcement.