Have you ever opened a trade only to see it executed at a different price level than you requested? Learn how to anticipate that problem here.

Anyone who has opened a trading position on any financial market must be aware of the risk of slippage. This condition is actually very common, so it certainly can happen to practically any tradable asset, including forex, stock, and even cryptocurrency. Therefore, it's important for every trader to understand how slippage works and how to deal with it. With such skill, you can limit your potential losses and minimize the damage if you do get negative slippage in your trade.

How to avoid slippage in trading

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What is Slippage?

When you open a position on a live trading account, you must expect it to be executed right away. However, you might find that the order can be executed at a different price than what you requested. This is what slippage is all about. Let's say that a stock's bid/ask prices are currently at $150.52/$150.55 on the broker's platform. You open a buy order for 100 shares, expecting the order to get filled at $150.55. However, in only a matter of seconds, the price moves to $150.54/150.57 before the order is executed. The broker ends up executing the order at $150.57 and as a result, you get $0.02 negative slippage per share.

Other important facts about slippage are as follows:

  • Any variation between the ordered price and the execution price is considered a slippage, so it can be negative or positive.
  • It depends on a number of factors including market volatility, whether the order is a buy or sell, an opening or closing position, and the direction of the price movement.
  • The platform will execute your order at the most favorable price available, but the actual result can be more favorable, equal, or less favorable for you.

 

Why Does Slippage Occur?

Financial markets are a complex space, meaning that there's a lot going on behind the scenes. You need to understand the following things in order to figure out why slippage happens:

 

High Volatility

High volatility is perhaps the biggest reason why slippage can occur. When the market is volatile, especially after the release of major economic news or data, the price tends to move really fast. During this period, brokers are typically scrambling to fill up their clients' orders. It can lead to significant price differences in executing the orders.

 

Not Enough Liquidity

For every buy order, there must be an equivalent sell order to match it. Similarly, whenever you sell an asset, someone must buy it from you. When the liquidity is low, it means that the market only offers a few opportunities to buy or sell assets. So it becomes more difficult to trade as the broker couldn't find the right match for the order you requested.

 

Big Position Orders

Another possible cause is when you order a very large position that's extremely hard to be filled in one go. Let's say you request 25 contracts of EUR/USD, but at this time, there are only 15 lots available. In this case, you will only get 15 and the remaining 10 will stay until the broker can find other sellers who want to buy them from you. In the meantime, the price might change, and hence, you could get slippage.

 

How to Avoid Getting Slippage

There are several ways to prevent slippage or minimize the impact. Here are some that you could do:

 

Avoid Major Economic Events

As mentioned above, the biggest slippages typically occur when the volatility is high. Therefore, try to avoid opening a position when there's a release of major economic news like FOMC announcements and a company's earnings announcement. This might sound like a great opportunity to make a profit from the large swings, but the same movements can also mean a much bigger risk, so it's better not to trade during this period to avoid getting slippage. To know when these high-impact events will be occurring, you can regularly check the economic calendar and mark the dates.

Even if you're not trading during a high-impact news release, you still need to maintain the risk of your trade well. Remember that the market is highly uncertain at times, so you need a safety net to keep your risk tolerable. In this case, using a stop loss is recommended. If the market turns against you and caught you by surprise, you won't lose too much money. Granted it won't eliminate the risk completely, but it certainly can minimize the damage by a mile.

 

Use Limit Order to Open a Position

Another option that you can choose to avoid getting slippage is using limit orders when opening a position. This order type basically allows you to open an order in the future at the price you want.

When a limit order is made, the order will be filled at the specified price only. If it's a sell order, the exchange will only execute it at the desired price or higher, and if it's a buy order, the exchange will only execute it at the desired price or lower. So, if the market can't fulfill your request, the trade simply won't be executed ever.

This also means that you can only get zero or positive slippage, which is favorable for you. The biggest downside is that your order might not be executed at all if the market price never reaches the desired price.

 

Use Stop Loss to Exit a Position

Once you open a live trading position, you're basically exposing your funds to market risks. There's not much that you can do to control how the trade is going to turn out, but you still can manage how you want to exit the market. Using a stop loss order could make sure that your loss is contained and won't get bigger than your tolerance level, although this can mean getting a little slippage in the process.

 

See How the Broker's Stance on Slippage

Lastly, it's worth mentioning that each broker executes the client's orders a bit differently.

Some brokers would execute the order no matter what even if the market doesn't match the requested price, while some others would execute the order as long as the price difference is within the trader's tolerance level. If the price is beyond the trader's tolerance level, the broker would either notify the trader first or immediately reject the order. If this happens, the trader would have to submit a new order and determine a new price.

Moreover, you can also choose to register with a zero slippage broker. This type of broker typically offers super-fast transaction speed, stable servers, access to multiple notable liquidity providers, and excellent safety measures.

 

The Bottom Line

In a nutshell, slippage is a specific condition in asset trading that can either be favorable or unfavorable for you as a trader (most slippages are negative, though). Understanding how slippage works can save you from potential losses and improve your trade.

One thing to keep in mind is that slippage is very common in asset trading. It's even inevitable at some point to avoid slippage because the price is always moving and there's nothing you can do to control it. Therefore, the first step is to accept the fact that slippage can happen sometimes, regardless of how good you are at trading.

Your best chance to avoid slippage is by managing your risk and trading wisely. It is recommended to trade when the market volatility is low but the liquidity is high. For instance, enter the market when the London or the US forex markets are just opened because the liquidity is high. It would also be really helpful if you choose brokers with fast transaction processing time This is to ensure that your order will be executed immediately at the price that you expected.