Slippage is the difference between a trade’s expected price and the actual price at which the trade is executed. Spillage occurs due to high market liquidity, low liquidity, and delayed order executions when the market cannot match orders at their preferred prices.
There are two types of slippage: positive and negative. Positive slippage occurs when orders are executed at better prices, and negative slippage occurs when orders are executed at worse prices.
An example of spillage is when an investor places a market order to buy a stock at $50, executed at $52, resulting in a $2 negative slippage.
Traders try to avoid slippage by using limit orders, trading highly liquid markets, breaking down large orders, and avoiding trading during economic news releases.
What is Slippage?
Slippage is the difference between the execution price of a trade and the requested price. Slippage occurs randomly in financial markets but is usually prevalent during high volatility or low liquidity periods when orders cannot be matched at their preferred price levels. Slippage leads to either profits or losses due to market fluctuations when an order is executed at a different price than expected.
The slippage definition is similar in all financial markets, including forex, stocks, cryptocurrency, and futures. Slippage affects the outcome of a trade, making it an important concept for traders to understand as they learn forex trading or investing.
What is Slippage Trading?
Slippage in trading refers to a situation where a trader’s order is filled at a different price than requested. Traders experience slippage when market prices change quickly between the moment they place an order and when it is executed. Slippage in trading often occurs during off-peak hours or economic news.
Investors and traders use limit orders instead of market orders to minimize the risk of slippage. Traders prefer to trade during peak liquidity trading hours when there is high liquidity in the market and choose less volatile assets like the major forex currency pairs.
What is Slippage in Forex?
Slippage in the forex market is the discrepancy between the price traders expect to enter a trade on a currency pair and the price at which the order gets filled. Slippage is usually lower in highly liquid currency pairs like EUR/USD, GBP/USD, and USD/JPY but higher in less popular forex pairs like the minor or exotic pairs.
Trading during the major market hours, e.g., Asian-London overlap or London-New York overlap, reduces the risk of forex slippage because these sessions have the highest liquidity.
An example of slippage in FX trading is when a trader places a market order to purchase EUR/USD at the market price 1.2000 just after major economic news. By the time the trade is executed, the price has already moved to 1.1210, resulting in a 10-pip slippage.
What is Slippage in Crypto?
Slippage in crypto is the difference between the execution price of a cryptocurrency and the intended order fill price. Crypto slippage happens frequently due to most crypto assets’ inherent volatility and liquidity constraints.
Popular cryptocurrencies like Bitcoin and Ethereum usually experience less slippage than newer cryptocurrencies due to their high trading volumes and liquidity, leading to price stability. Understanding slippage is important in crypto trading because slippage has the potential to be quite large, leading to losses when large trades are executed at unfavorable prices.
What is the Importance of Slippage?
Slippage is important in forex trading as it directly affects the execution of trades and impacts the total profits or losses experienced by short-term traders. When slippage occurs in volatile markets, even in small margins, trades are executed at worse prices than expected, increasing the overall cost of trading.
Large slippage affects stop-loss orders and may lead to premature or higher-than-expected losses when the exit price is worse than the set stop-loss.
Short-term traders like scalpers and day traders, who profit from tiny market moves, must adjust their trading plans using limit orders to accommodate slippage in their entries and exit strategies.
Why is Slippage Important in Forex Markets?
Slippage is important in forex markets because it impacts the precision of currency trade executions. High slippage on a currency pair means that a market order or stop-loss position is executed at a significantly different price from the quoted price. The slippage is a sign of inefficiencies in the market caused by high volatility or news events.
Major currencies in the forex exchange markets experience lower slippage because of their high trading volumes despite trading 24 hours a day, five days a week. Continuous trading often leads to periods of low volatility during off-peak hours, increasing the slippage potential.
Slippage affects the precision of forex traders involved in algorithmic or high-frequency trading and impacts the results of their automated trading strategies. Large slippage in forex exposes the traders to losses, making it hard for inexperienced traders who do not have a set risk tolerance level to succeed.
Slippage influences how traders choose forex brokers. Traders opt for reliable and reputable brokers with advanced technologies for fast and efficient order execution to reduce the occurrence of slippage.
How does slippage work?
Slippage in forex works when there is a gap between the price quoted for a currency and the price at which the trade is executed. Differences due to slippage occur when forex brokers or market makers fail to match buy orders and sell orders at the same price due to high market volatility, causing rapid price changes.
When a trader places a market order, the broker looks to fill the order at the best price. Non-dealing brokers pass the order to liquidity providers to find matching orders. Slippage occurs when the market prices fluctuate and change before the order finds a potential counterparty.
The high speed of executing market orders from brokers increases the chances of slippage when markets move quickly. For instance, a stock trader may try to purchase a stock at $10 per share, but due to high demand or lack of liquidity at that price, the order gets filled at $10.05, resulting in a $0.05 per share slippage.
Slippage is negative when it executes trades at a worse price than requested and positive when it executes trades at better prices than requested.
Slippage plays a pivotal role in forex trading, influencing the precision of trade executions, the profitability of the trader and the risk management strategies put in place by the forex trader.
What are the Different Types of Slippage?
The different types of slippage are listed below.
- Positive Slippage
- Negative Slippage
- No Slippage
1. Positive Slippage
Positive slippage occurs when a trade is executed at a more favorable price than the one initially requested by the trader.
Positive slippage typically happens in highly volatile markets where price movements are rapid. When a trader places an order, the market price may fluctuate between the time the order is placed and the time it is executed. In cases of positive slippage, the market price moves in a favorable direction for the trader. As a result, the trade is executed at a better price than anticipated. The occurrence of positive slippage is often facilitated by high market liquidity and efficient order execution systems that are designed to respond quickly to price changes.
An example of positive slippage is when a trader places a buy order for the EUR/USD pair at 1.2000. Due to swift market movements, the order was filled at 1.1995. The trader experiences positive slippage, gaining a better entry point than initially intended.
2. Negative Slippage
Negative slippage occurs when a trade is executed at a less favorable price than the one initially requested by the trader.
Negative slippage often occurs in fast-moving or thinly traded markets. When a trader places an order, there might be a delay in execution due to high volatility or low liquidity. The market price can move against the trader’s favor during the delay. Consequently, the trade gets executed at a worse price than expected. Slow order processing, network delays, or inadequate market depth exacerbate the negative impact of these price movements.
An example of negative slippage is when a trader places a sell order for the EUR/USD pair at 1.2000. Due to rapid market fluctuations, the order is filled at 1.2005. The trader encounters negative slippage, resulting in a less advantageous exit point.
3. No slippage
No slippage occurs when a trade is executed exactly at the price requested by the trader.
No slippage generally occurs in stable and liquid markets with minimal violent and sudden price movements. When a trader places an order, the execution happens almost instantaneously at the specified price. Efficient matching engines and high market liquidity contribute to the absence of slippage. No slippage is common in major currency pairs with significant trading volumes and tight bid-ask spreads.
An example of no slippage is when a trader places a buy order for the EUR/USD pair at 1.2000. The order is executed precisely at 1.2000. The trader experiences no slippage, achieving the exact entry point desired.
How to Calculate Slippage?
To calculate slippage, there are four steps:
- Identify the expected price: The expected price is the market price at the time the order is placed.
- Determine the actual execution price: The execution price is the price at which the trade was filled.
- Calculate the slippage: Find the difference between the actual execution and expected prices. The formula is (Expected Price – Actual Execution Price) / Expected Price.
- Calculate slippage percentage: Express the absolute slippage value as a percentage using the formula: Slippage (%) = (Executed Price – Expected Price) / Expected Price * 100.
What happens if slippage is too high?
High slippage, usually negative slippage, often means that the actual execution price of trades is significantly worse than the expected fill price, resulting in higher costs for buying assets and lower proceeds from selling. The discrepancy caused by negative slippage results in reduced profit margins or total profit elimination for traders relying on short-term trading strategies.
High slippage makes risk management challenging for traders, as stop-loss orders may not be executed at predicted levels, increasing the likelihood of premature stop-outs.
Markets characterized by high slippage undermine investor and trader confidence, discouraging frequent trading and reducing overall market liquidity. Some brokers may respond to high slippage conditions by widening their bid-ask spreads or imposing higher commissions to mitigate their own risk exposure.
Why does slippage Occur?
The reasons why slippage occurs are listed below.
- Market volatility: Rapid price changes in volatile markets make executing trades at the desired price levels hard. High market volatility is mainly experienced during major news events.
- Liquidity issues: Low liquidity markets lack enough buyers and sellers to match orders at the desired price levels, resulting in prices being executed at different levels.
- Order types: Market orders are susceptible to slippage as they are executed at the best available price, which is not always the requested price.
- Order execution speeds: Delays in order execution from system glitches, slow order routing, broker inefficiencies, or network latency often cause price changes between the order placement and execution time, resulting in slippage.
- Order sizes: Large orders may exceed the available liquidity at the current price level, causing parts of the order to be filled at different prices, leading to slippage.
How often does slippage occur in Copy Trading?
Slippage occurs frequently in copy trading, more than in regular trading, due to the time delay between the signal provider executing the trade and the copy trader’s platform receiving and executing that signal. Market prices change during latency, causing slippage.
Copy trading in volatile markets is prone to partial fills, where the copying platform cannot fill the entire copied order at the exact price the signal provider executed, leading to multiple fills at different prices.
Slippage often occurs in copy trading, where the signal provider and copy trader use different brokers, each with varying execution speeds and liquidity access. These discrepancies result in slippage and may be costly to forex traders who do not understand “what is copy trading“.
How does slippage affect Forex Trading Cost?
Slippage affects the cost of forex trading by increasing transaction costs and reducing the profit potential of successful trades. Negative price slippage increases the total transaction costs because of the increased difference between the actual execution price and the expected price.
Slippage eats into the profits of scalpers and day traders who target small pip movements in the markets, making the venture unattractive to market participants.
Many novice traders experience higher forex trading costs through unexpected losses due to premature stop-loss triggers when trades are executed at a worse price than expected.
Does slippage occur in a Demo Forex Account?
Yes, slippage occurs in demo forex accounts, but not to the extent of slippage in live market conditions. Forex brokers simulate slippage in demo accounts to simulate a realistic trading experience for traders. Slippage may occur more frequently in demo accounts during simulated periods of volatility to prepare traders for various market conditions.
The primary purpose of a demo forex account is to grant potential traders the opportunity to learn and practice trading strategies without risking real capital. Simulated slippage on these accounts is not true, but it causes a slight difference between the requested and filled price.
What is an Example of Slippage?
An example of slippage in trading is when a forex trader’s orders are executed at a different price than they expected. The slippage is positive if the order was executed at a better price or negative if the fill was at a worse price.
A trader opens a GBP/USD order at the current market price 1.3650, executed at 1.3660. The trader got a worse fill with a negative slippage of 10 pips (1.3660 – 1.3650 = 10). The same trader would have a positive slippage of 10 pips if the GBP/USD order was filled at 1.3640 (1.3650 – 1.3640 = 10).
How to Avoid Slippage in Forex?
The steps to avoid slippage in trading are listed below.
- Use limit orders: Limit orders specify the maximum price a trader is willing to pay or the minimum price they are willing to accept.
- Trade during high liquidity periods: Trading during the major market trading sessions reduces slippage risk due to the high liquidity and tight spreads.
- Break down large orders: Split large orders into smaller chunks to reduce market impact and the likelihood of slippage.
- Avoid trading during major news events: Economic news releases usually result in high volatility and large price fluctuations, leading to slippage.
- Monitor market conditions: Monitor market conditions to be aware of market trends and volatility to avoid unfavorable market conditions.
- Choose reliable brokers: Choosing a reliable and reputable broker with the best execution policies ensures fast order executions and lower trading costs.
Is slippage illegal?
No. Slippage is not illegal. Slippage is a normal consequence of inefficient financial markets where an order is executed at a price different from the quoted price. Slippage occurs due to high market volatility and delays in order executions, often resulting in higher trading costs for traders.
Slippage becomes illegal when forex brokers intentionally exploit order executions when traders open positions. Regulators globally investigate brokers facing such complaints and encourage traders to look for forex brokers with good execution policies to limit the chances of slippage.