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Price slippage can unexpectedly impact your trades, leading to a difference between the price you anticipated and the price at which your order is executed.
Whether you are trading stocks, forex, or cryptocurrencies, understanding slippage is essential for managing risk.
Understanding Price Slippage
Slippage occurs when there is a discrepancy between the expected price of a trade and the actual execution price.
It can occur in any financial market, and it affects profitability, risk exposure and trading discipline.
- Market Order Execution: When you place a market order, the trade executes at the best available price, which may differ from the last quoted price.
- Trading Psychology: Slippage can cause frustration and lead to impulsive decisions, which add to trading risk.
- Strategic Awareness: Understanding slippage is part of preparing entry and exit plans.
Offers at the price you saw
Offers at the next price
Your market order
The first part fills here
The rest fills here
Illustrative chart, not live data or a recommendation.
Causes of Price Slippage
Several market factors influence the final execution price of a trade.
- Market Volatility: High volatility, often triggered by economic events or major news announcements, can lead to rapid price fluctuations.
- Liquidity Levels: In markets with low liquidity, finding a counterparty at the desired price can be difficult, leading to execution at a different rate.
- Order Type and Timing: Market orders execute at the best available price, which may not match the last displayed price, particularly in fast-moving markets.
Knowing these factors can inform how an order is planned. It does not protect a return.
Impact of Price Slippage on Trading Strategies
Slippage can affect a whole trading strategy and alter expected outcomes.
- Risk Management Adjustments: Increased slippage can impact stop-loss and take-profit levels, requiring modifications to overall risk strategies.
- Emotional and Psychological Effects: Unexpected losses from slippage can lead to reactive trades instead of planned ones.
- Strategy Adaptation: Slippage makes traders rethink how and when they place orders.
Stop Orders and Slippage
A stop order, sometimes called a stop-loss order, becomes a market order when a particular price level is reached.
The US Securities and Exchange Commission’s investor office calls the stop price “a trigger that causes the stop order to become a market order.” The execution price, it says, “can deviate significantly from the stop price in a fast-moving market where prices change rapidly.”
A stop-limit order can only be filled at its limit price or better, “but the limit price may prevent the order from being executed.” France’s regulator says that, among stop orders, only stop-limit orders let investors control the price. A stop order, then, is not a floor under a loss.
Strategies to Minimize Price Slippage
Price slippage cannot be entirely eliminated, but several techniques can help minimize its impact.
- Limit Orders: A limit order is an order to buy or sell at a specific price or better, and it can only be filled if the market price reaches the limit price.
- High-Liquidity Markets: Entering trades in markets with higher liquidity can reduce the risk of large price discrepancies.
- High-Volatility Periods: Economic announcements, earnings reports, or major geopolitical events can lead to extreme price swings, increasing the likelihood of slippage.
- Position Size: Large trade orders can experience slippage due to the limited number of buyers or sellers at a given price level.
None of these techniques removes slippage, and some have a cost of their own, such as an order that does not fill.
Examples of Price Slippage
The first two examples describe the idea in words, because any figure here would be made up. The third is a real case.
- Forex Trading: A market order to buy a currency pair is placed while the price is moving quickly. The trade executes at a different price from the one last quoted.
- Stock Market Orders: A trader places a market order for a stock. By the time the order is filled, the price has moved.
- Stop Orders: In a case published by France’s regulator, an investor placed stop-loss orders to sell with triggers at 12.03 and 11.98, after a last auction price of 12.05. The next day’s opening auction came in at 11.34, and the orders executed at the following auction, at 11.42.
A fast-moving market may also cause parts of a large market order to execute at different prices.
Conclusion
Price slippage is an unavoidable part of trading. Understanding its causes can limit its impact, but cannot remove it.
Volatility, liquidity and order execution methods all contribute to slippage, and each belongs in a trading plan.
Orders are part of the contents of ETTFOS Quantum Leap, in Module 3, alongside contracts, margins, leverage and liquidity.
