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What is Slippage and Its Benefits

derivatives tradingfuture and optionsfutures and options trading
18 Aug 20236 mins readBy MOFSL

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

Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
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