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.
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.