Trading Slippage: What Is It and How Does It Occur?

Understanding trading means understanding all the minor nuances and technical terms that come with it. In times of significantly higher market volatility or low liquidity, the importance of these seemingly minor details is magnified, making traders' expected returns mismatch with their real ones.

In most cases, the biggest contributing factor to this is slippage. Namely, slippage refers to the difference between the expected price of a trade and the actual execution price.

Let's analyze this in more detail.

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Trading Slippage Explained

In the simplest terms, slippage is when the price of an instrument has changed from the time a trader places their order to its actual execution. In an ideal scenario, the slippage would be 0%, meaning that traders execute their positions exactly as they ordered them, but this rarely happens.

It's worth mentioning that slippage can be both positive and negative. Positive slippage occurs when the instrument is trading higher than expected, and therefore, the execution price is better for the trader. On the other hand, negative slippage is when the trader's order executes at a worse price than the one they intended to enter.

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How Does Slippage Occur?

Slippage usually occurs when market conditions are volatile or unpredictable, such as after some major news is released or during macroeconomic events. When things like these happen, the instrument may gap or jump quickly in price and cause the trader's entry order to be executed at an unexpected level.

In other cases, slippage can occur due to brokerage issues, such as slow order execution or incorrect pricing from the brokerage's liquidity provider.

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Final Thoughts

Although slippage can be both positive and negative, it's usually considered a negative market phenomenon, as it reduces traders' profits and increases their losses. However, with careful risk management techniques, slippage can be potentially minimized.

The key is to identify potential sources of slippage before entering any trade and have strategies in place that allow you to adjust quickly in times of high volatility.

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