Slippage

Slippage refers to the difference between the expected price of a trade and the actual price at which the trade is executed. It typically happens in fast-moving or volatile markets, where prices can change rapidly between the time a trade order is placed and when it is actually filled.

Slippage can occur with any type of order, but it is most commonly associated with market orders, as these are executed at the best available price in the market at that moment.

There are two main types of slippage in trading: positive slippage and negative slippage.

Positive one occurs when the trade is executed at a better price than expected, resulting in a favourable outcome for the trader. For example, one wants to buy a currency pair at 1.2000. They submit the buy order at 1.2000, but the market is moving quickly. The best available price changes to 1.1995 (5 pips lower than the requested price).

The order is filled at 1.1995, which is a better price than expected (positive slippage).

Negative slippage on the other hand happens when a trade is executed at a worse price than expected, leading to a less favourable outcome for the trader. As an example, one wants to sell a currency pair at 1.3050.

They submit your sell order at 1.3050, but the market is volatile and the price shifts upward. The best available price changes to 1.3065 (15 pips higher than the requested price).

As a result, the order is filled at 1.3065, which is a worse price than expected (negative slippage).

Slippage can occur with stop loss orders as well. A stop loss order is designed to automatically close a position at a specified price level to limit potential losses. However, due to rapid market movement or low liquidity, it might not always execute at the desired price. This results in slippage, either positive or negative, depending on how the market moves.

Traders can protect themselves from slippage by using limit orders instead of market orders. It will help to specify the exact price at which they are willing to buy or sell. However, this does not guarantee execution if the market price does not reach the limit order.

They can additionally avoid trading during periods of high volatility, such as right before or after economic reports or news events.