What Is Slippage in Trading?
Slippage happens when your trade is executed at a different price than you expected. This usually occurs during volatile market conditions, like after major news or economic data releases, or in less liquid markets where there aren’t enough buyers or sellers to match your price.
To minimise slippage, trade in liquid markets, avoid trading during big news events, and keep your risk balanced. While slippage can’t always be avoided, good risk management means it won’t ruin your trading.
What Is Slippage?
Slippage happens when the price at which your trade is executed is different from the price you expected. For example, you might set a stop-loss to sell your position at $50, but it gets triggered at $48. Why? Well, slippage occurs when there’s not enough liquidity available to match your price at the exact level you set. The price has to move further to fulfil your order.
For any trade order to be executed, there needs to be both a buyer and a seller. If you’re trying to sell, there has to be someone willing to buy at the price you’re offering and vice versa. But if market conditions are chaotic, finding that counterparty at your desired price can become tricky. That’s when slippage kicks in.
Why Does Slippage Happen?
Slippage is more common during periods of extreme market activity or when trading in less liquid markets. Here are a few scenarios where slippage tends to happen:
- Unexpected News: Things like surprise political or economic announcements can send markets into a frenzy pushing the price through your orders.
- Economic Data Surprises: If an important data point (like unemployment or inflation) misses expectations by a wide margin, markets can move sharply.
- Flash Crashes: These are rare but can happen due to technical issues or glitches in financial systems.
In these situations, traders may rush to buy or sell, creating a "herd effect" where prices move so fast that your stop-loss or target price can’t keep up, and the order gets filled at a different price.
How Does Slippage Impact Traders?
Slippage is especially noticeable in shorter-term trading. If you’re using tight stop-losses or trading with large contract sizes, even a small price difference can translate into a bigger loss than you expected. For example, if your stop-loss doesn’t get triggered due to a strong market move, your order might be filled at a worse price.
This can be frustrating, but it’s part of trading. It’s not always a sign of poor strategy; sometimes, the market just moves faster than you can.
Can You Avoid Slippage?
The short answer is: not entirely. Slippage is a natural part of trading, especially during volatile times. But there are a few things you can do to reduce its impact:
- Trade in More Liquid Markets: Markets with higher daily trading volumes, like major currency pairs or blue-chip stocks, are less likely to experience extreme slippage. Liquidity means there are more buyers and sellers available, increasing the chances of finding a counterparty at your desired price.
- Keep Position Sizes Small: Avoid putting too much of your capital into one trade. Risking no more than 2% of your account per trade ensures that even with slippage, your losses won’t spiral out of control.
- Be Aware of News Events: Keep an eye on economic calendars and news feeds. Trading during major announcements can increase the risk of slippage.
Slippage can feel annoying when it happens, but it’s something every trader deals with. It’s just one of those things about the markets, unpredictable, but manageable with the right approach.