Slippage

Slippage refers to the difference between the expected price of a trade and the actual price at which the trade is executed. This phenomenon typically occurs during periods of high volatility or when a large order is executed but there is insufficient volume at the desired price to maintain the expected price. Slippage can be either positive or negative, impacting the trading outcome accordingly.

How It Works

Slippage commonly occurs in fast-moving markets, such as during major economic announcements or unexpected geopolitical events. For instance, if a trader places a market order to buy 1,000 shares of a company at £10 per share, but the price jumps to £10.50 before execution, the trader experiences a negative slippage of £0.50 per share. This can lead to higher costs and reduced profitability for traders who fail to account for potential slippage.

Conversely, slippage can also be positive. Using the same example, if the market order to buy 1,000 shares is filled at £9.80 instead of £10, the trader benefits from a positive slippage of £0.20 per share. While positive slippage is less common, it can provide unexpected gains. Slippage is most prevalent in forex and stock markets, particularly when trading in high volumes or during times of low liquidity.

Key Points

• Slippage can occur in any market, but it is more frequent in volatile environments.
• Both positive and negative slippage are possible, influencing trading outcomes.
• High liquidity and stable markets typically experience less slippage.
• Using limit orders can help mitigate the risk of slippage by setting a maximum acceptable price.
• Understanding slippage is crucial for accurately calculating potential profits and losses.

Relevance to Traders

Slippage is a critical consideration for traders when selecting a broker, as some brokers may offer better technology or liquidity solutions that minimise slippage. Brokers using an ECN (Electronic Communication Network) model might offer lower slippage due to access to a broader range of liquidity providers. It's important for traders to assess a broker's execution policy, including average slippage rates, before committing to a platform.

Moreover, traders employing high-frequency strategies or trading during significant news events should be acutely aware of potential slippage impacts. By choosing a broker with robust execution capabilities, traders can better protect their investments from unexpected slippage and enhance their overall trading strategy's effectiveness.