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Slippage - What is it and why it is not good for your trading strategies

What Exactly Is Slippage?

The discrepancy between the projected price of a deal and the price at which the trade is executed is referred to as slippage. Slippage can happen at any time, although it is more common during times of high volatility when market orders are employed. It can also happen when a large order is completed but there isn't enough activity at the selected price to keep the existing bid/ask spread.

Main points about Slippage

What Is the Process of Slippage?

Slippage does not signify a negative or positive movement because it refers to any difference between the expected execution price and the actual execution price. When an order is executed, the security is bought or sold at the best price available from an exchange or other market maker. This can result in outcomes that are better, equal to, or worse than the targeted execution price. Positive slippage, no slippage, or negative slippage refers to the difference between the final execution price and the anticipated execution price.

Most Slippage occurs on Market Orders

Market prices can fluctuate fast, causing slippage to occur between the time a transaction is ordered and the time it is executed. The phrase is used in a variety of market contexts, but the definitions are the same. Slippage, on the other hand, tends to occur in varied situations for each site.

Limit Orders may prevent Slippage

While a limit order minimises negative slippage, it also entails the risk that the trade will not be completed if the price does not return to the limit level. This risk rises when market movements occur more quickly, limiting the amount of time for a deal to be completed at the targeted execution price.

Causes of Slippage in the Financial Markets

Slippage can occur as a result of a rapid shift in the bid/ask spread, which is one of the most prevalent causes. When this occurs, a market order may be executed at a lower or higher price than expected. Negative slippage means that the ask in a long transaction has increased or the bid in a short trade has declined. Positive slippage means that the ask in a long transaction has lowered or the bid has climbed in a short trade. Limit orders and avoiding market orders are two ways market players might protect themselves from slippage.

An Example of Slippage in the Stock Markets

Assume Apple's bid/ask prices are listed on the broker interface as $183.50/$183.53. A market order for 100 shares is placed, with the expectation that the order will be completed at $183.53. However, automated programmes' microsecond operations raise the bid/ask spread to $183.54/$183.57 before the order is completed. The order is then completed at $183.57, with a negative slippage of $0.04 per share or $4.00 per 100 shares.

Slippage is a big problem in the Forex Markets

Forex slippage happens when a market order is executed or a stop loss closes a position at a rate that differs from the rate specified in the order. Slippage is more common in the forex market when volatility is strong, such as after a news event, or when the currency pair is trading outside of peak market hours. Reputable forex brokers will execute the trade at the next best price in both cases.


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Source: Investopedia

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Reviewed by Arpita Singh

Arpita SinghArpita Singh is the main writer at ForexBroker.ae. As a senior investment professional with 10+ years of experience working at top-tier Private Equity and Sovereign Wealth Fund; she is also responsible for fact-checking concepts, reviews, and related details about brokers and exchanges listed on this website. Full Bio.