What is slippage?
Trading slippage refers to the difference between the anticipated price of a trade and the actual price at which it is executed. It often occurs during periods of high volatility or around major news events. Generally, slippage doesn’t always mean a bad thing. There are also times when it can occur in the trader’s favor and result to a bigger amount of profit. Nevertheless, traders should make it a practice to consider the amount of slippage they are willing to take before they open a trading position.
Forex and stocks slippage
Slippage occurs in forex whenever an order is executed without a limit order or when a stop loss is triggered at a less favorable state than what is originally set by the trader. It usually results in an order executed far from the desired price. During these situations, most dealers execute the order at the next best price available unless a limit order ends the trade at a predetermined price point.
Although a limit order can prevent the negative effects of slippage, it could also result to a risk of not fully executing a trade if it happens to pass through a non-favorable price before bouncing back. This risk is increased during market fluctuations.
Stock slippage, on the other hand, occurs when there is a change in the spread. During this situation, an order may get executed at a less favorable price than what is originally expected. For long trades, the ask may have increased during a slippage, while the bid may have lowered in the case of a short trade. These situations can be avoided by not making unnecessary market orders, especially during volatile market times.
What causes slippage to occur?
There are several reasons why slippage occurs:
When there is low liquidity – For every buyer, there must be a corresponding seller that offers the exact same amount of trade price and size. When there is an imbalance between the two, the market adjusts to the supply and demand for the security, which can cause widened spreads.
When there is a time delay – Prices may change because of slight time delays between when the trader enters a trade and when the broker receives and executes the order. Thus, it is very important to consider the order execution speed of a broker.
When the market opens at a different price than when it is closed – Sudden market news can sometimes affect market prices during closed times. Because of this, orders are usually processed at the next best price available when the market opens, which may be a bit far from the set stop loss.
When there is high volatility – During periods of price fluctuations, there may be sudden movements that cause prices to go past the set stop loss. This may result to not being able to execute trades at the right time. Because of this, prices may be a bit different than what traders expect.
Slippage is a common thing among traders. It is always expected to happen, especially in volatile trading environments where prices can move quickly over a broad range. Fortunately, there are strategies and tools available that could help in mitigating the problems caused by slippage. Despite these, slippage cannot be totally avoided. It is a part of trading like any other cost just like fees and commissions. Sometimes, it is also a cost worth paying, but not all the time. Just make sure to plan all your trades and consider the risks involved before placing an order.
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