In trading, slippage is the difference between the expected price and the price at which your trade is executed. Slippage can in any chart, regardless of the underlying asset they are trading. It can have a great effect on your trading performance. To get a better understanding of what a slippage is, take a look at the chart below:
- A trader opens a short-term position at a certain price.
- The price is growing but the trader lingers to close the trade. The trader is waiting for a news release that may increase their profits.
- To play it safe, the trader places a stop loss above the opening price. This way, even if a price goes down, the trader will walk away with a small profit.
- Following the news release, the price starts to move fast. The stop-loss order is not activated. As a result, the closing price turns out to be lower than the opening price. The trade closes with a loss. The trader ends up with a price worse than expected.
Before reading the article and writing your questions in the comments section, I recommend to watch this video. It’s not long but covers the biggest part of questions on the topic.
Why does slippage occur?
Speaking, slippage occurs when no one wants to open a trade at your desired price. Slippage is likely to occur in fast-moving, high-volatility markets and before major announcements.
During periods of uncertainty, big market players abstain from trading to avoid unnecessary risks. At the same time, this is a great opportunity for speculative traders willing to capitalize on high volatility. Multiple speculative traders start to open positions all at the same time, which eventually causes a price to make a sharp leap. However, certain price zones are characterized by an imbalance between buy orders and sell orders. Such zones are where slippage usually occurs.
Factors that affect slippage
If you’re trading in high-volatility markets or using scalping and piping techniques, you must be prepared to deal with slippage. It’s important to understand that the size of slippage depends on a variety of factors, such as:
- market volatility;
- order execution speed;
- type of order.
Volatility is a financial indicator showing how fast the price of an asset is changing. Market volatility is affected by multiple factors:
- Overall economic situation which is shaped by major events.
- Buyers’ and sellers’ activity which depends on their choice of a financial asset and trading session.
- Macroeconomic data releases.
In the high-volatility chart above, you can see multiple slippages. Take a look at how new candles formed far the closing prices of the previous candles (see the chart above).
Type of Order
How fast your order is executed directly depends on the type of your order:
- Some brokers offer Instant Execution orders that protect a trader from slippage. However, if a price had drastically changed just before you opened a position, the trade will be canceled and you’ll be offered a new price.
- Market Execution refers to a very common type of order whereby you open a position at the current price.
- If you’re using the Aurora trading platform, you have access to a special order known as Stop Limit Order. It’s a combination of a stop-loss order and a limit order. In other words, this is a stop order with a limit on an opening price.
How to reduce your slippage losses
The most important thing is to find out whether you should worry about slippages in the first place. If you’re a medium- or long-term trader, slippages pose no threat to your trading account. If you’re a day trader, be sure to follow these recommendations to cut your slippage losses:
- Avoid trading during high volatility. This tip doesn’t work for traders who only trade high-volatility instruments.
- Around major news events, the market starts getting nervous and unsteady. Check out the economic calendar to avoid trading before and after important announcements. Otherwise, you risk facing a large slippage.
- If you’re using short-term strategies, you can place instant execution orders. Keep in mind, though, that a broker may cancel your order in case of a drastic change in price.
- To reduce the risk of slippage, some traders use pending orders. Remember that the buy limit and sell limit are the only types of pending orders that are executed without slippage.