Understanding Slippage
Let me explain slippage to you directly: it's the difference between the price you expect for a trade and the price at which it actually gets executed. You might encounter this at any time, but it's especially common during high volatility when you're using market orders. It also happens with large orders where there's not enough volume at your chosen price to keep the bid/ask spread stable.
Key Takeaways on Slippage
Slippage covers any case where you, as a market participant, end up with a different execution price than what you intended. It happens when the bid/ask spread shifts between your order request and its execution by an exchange or market maker. You'll see slippage in all venues, from equities and bonds to currencies and futures. We can break down the final price versus your intended one into positive slippage, no slippage, or negative slippage. To limit it, avoid trading late in the day, stick to calm and liquid markets, and use limit orders.
How Slippage Works
Slippage isn't inherently good or bad; any deviation from your intended price counts as slippage. When you place an order, the security gets bought or sold at the best price available from the exchange or market maker. This could turn out better, the same, or worse than what you aimed for. We categorize it as positive, none, or negative based on that comparison.
Markets move fast, so slippage can slip in during the lag between ordering and completion. The term applies across venues with the same definition, but the scenarios differ by market. A limit order stops negative slippage, but it risks your trade not happening if the price doesn't hit your limit. This risk grows in fast-fluctuating markets, shortening the window for execution at your price.
Important Advice
Here's something crucial: you can avoid negative slippage by placing limit orders.
Example of Slippage
A frequent cause of slippage is a sudden shift in the bid/ask spread, leading to your market order executing at a price that's better or worse than planned. For negative slippage, the ask rises in a long trade or the bid drops in a short one. Positive slippage means the ask falls in a long or the bid rises in a short. To protect yourself, use limit orders and steer clear of market orders.
Take this example: Apple's bid/ask is $183.50/$183.53 on your broker's screen. You place a market order for 100 shares, expecting $183.53. But high-speed trades push it to $183.54/$183.57 before filling, so you get $183.57— that's $0.04 per share or $4 total negative slippage.
Slippage in the Forex Market
In forex, slippage hits when a market order executes or a stop loss closes at a rate different from what you set. Many of you use stop-loss orders to cap losses, but options can also limit downside in volatile or consolidating markets.
It's more likely during high volatility from news or off-peak hours for the pair. In those cases, reputable dealers fill at the next best price.
How to Reduce the Impact of Slippage
Slippage is just part of trading, but you can avoid or minimize it. It often strikes in volatile or low-liquidity conditions, so consider your timing and the security type.
Trade during calm periods: Less volatility means less slippage risk. Skip trading around major announcements or earnings reports that can spike prices.
Opt for limit orders: These execute only at your specified price or better, dodging negative slippage, though they might not fill at all.
Tip on Slippage Tolerance
Some platforms let you set a maximum slippage tolerance in percentage terms when placing orders.
Slippage in Crypto
Slippage affects all assets, but in crypto, it's more probable due to higher volatility and sometimes lower liquidity.
What Is a 2% Slippage?
Brokers might let you set a max slippage tolerance. A 2% slippage means execution up to 2% off your expected price. For instance, ordering shares at $100 but paying $102 is 2% negative slippage.
Is Positive Slippage Good?
Yes, positive slippage is good because it means you got a better price than you expected.
The Bottom Line
Slippage happens when your trade executes at a price different from requested, and it's inherent to investing. Bid/ask spreads can shift during order fulfillment. It occurs in all markets like equities, bonds, currencies, futures, and is more frequent in volatile or illiquid conditions.
You can minimize it by trading in liquid, stable markets. Slippage can be positive or negative—positive benefits you with a better price, negative does the opposite.
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