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What is Slippage and Its Benefits

18 Aug 2023

Introduction

  • To navigate the volatile world of the financial market, traders and investors require a variety of principles that can influence their trading outcomes. 
  • One such crucial factor is known as slippage, which has a substantial impact on trade execution and profitability. 
  • This article will explain the concept, process, and significance of slippage for traders.

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What is Slippage?

  • The term 'slippage' refers to the gap between the projected price of a trade and the actual price at which the trade is executed.
  • It's a regular occurrence in fast-paced markets, especially at times of extreme volatility or little liquidity.
  • Slippage can occur in both purchasing (long) and selling (short) positions, influencing traders' entry and exit points.

How Does Slippage Occur?

  • Market volatility: Slippage is frequently witnessed amid volatile market conditions when prices tend to move quickly. The execution price may differ from the trader's targeted price if demand and supply dynamics change.
  • Order size: Larger trade orders may have more slippage, particularly in markets with limited liquidity. Large orders executed in non-liquid marketplaces may cause price fluctuations as the market absorbs the transaction.
  • Economic events: Significant economic events, news releases, or unforeseen events can cause market swings. This results in slippage if trades are conducted during these times.
  • Market hours: Slippage can vary depending on the market hour. More volatility and slippage are usually noted at the time when the markets open and close.
  • Latency: Slippage can occur as a result of the time it takes for a trader's order to reach the market and be executed, which is referred to as latency.

What are the Implications of Slippage for Traders?

For traders, slippage has the following implications:

  • Slippage can cause unforeseen costs for traders, lowering their total trading performance and returns.
  • Slippage can affect trade execution, causing deals to enter or exit at different price levels than expected.
  • Slippage can cause stop-loss orders to be activated at different levels than expected, thus increasing losses.
  • Traders may lose potential earnings due to slippage if the market swings in their favor, but the trade is executed at a lower price.

Conclusion

  • Slippage is a critical subject for traders to understand and efficiently manage. 
  • While it is a typical occurrence in financial markets, traders can lessen its impact by employing limit orders, establishing suitable trade sizes, and keeping a tab on market conditions.
  • Staying up-to-date on economic developments and market trends also helps traders make more educated judgments and better negotiate any slippage.
  • Traders can improve their entire trading experience and boost the likelihood of positive outcomes by including slippage control tactics in their trading methodology.

 

Related Articles: Tick Size in Trading: Understanding the Smallest Price Movements What is the Schaff Trend Cycle and Its BenefitsHow to Find Stocks to Swing Trade | Ultimate Guide to Positional Trading

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