Key Takeaways
- Difference between expected and executed trade price.
- Caused by volatility, low liquidity, and delays.
- Can be favorable or unfavorable for traders.
- Common in market, stop-loss, and gap orders.
What is Slippage?
Slippage is the difference between the expected price of a trade and the actual price at which it is executed, often caused by market volatility or low liquidity. This phenomenon can impact various assets, including stocks, forex, and futures, affecting your trade outcomes.
Understanding slippage is essential for navigating dynamic markets influenced by factors such as macroeconomics and market conditions.
Key Characteristics
Slippage has distinct features that influence your trading experience:
- Market volatility: Rapid price changes during events like economic data releases can cause slippage.
- Order type impact: Market orders are more prone to slippage than limit orders, which aim to control execution price.
- Liquidity dependency: Low liquidity widens bid-ask spreads, increasing slippage risk.
- Positive and negative slippage: You may experience better or worse prices than expected.
- Market gaps: Slippage can occur after market closures or significant news, causing price gaps.
- Stop-loss orders: Triggered stops can lead to slippage when converted to market orders.
How It Works
When you place an order, slippage occurs if the price moves between submission and execution, especially in volatile or illiquid markets. For example, a market order prioritizes speed over price, increasing exposure to slippage.
Using limit orders can reduce slippage by setting a maximum acceptable price, but they may not always fill during rapid market moves. Implementing strategies from guides like best online brokers can help manage execution quality and minimize slippage.
Examples and Use Cases
Slippage affects different markets and companies in various ways:
- Technology stocks: A market order for Alphabet Inc. (GOOGL) shares might fill at a slightly different price due to rapid price changes during trading.
- Airlines: Companies such as Delta may experience slippage in their stock trades during volatile market conditions or after major industry news.
- Investment strategies: Choosing ETFs with high liquidity, as outlined in the best ETFs guide, can reduce slippage impact.
Important Considerations
Slippage is inherent in active markets and cannot be fully avoided, but you can mitigate its effects by trading liquid assets and avoiding peak volatility periods. Employing limit orders and monitoring market depth can help control execution price.
Additionally, understanding the role of dark pools in trade execution may provide insights into hidden liquidity and slippage risks. Effective risk management and informed broker selection remain crucial in minimizing slippage’s impact on your portfolio.
Final Words
Slippage can significantly impact trade costs, especially in volatile or low-liquidity markets. To minimize its effects, compare execution quality across brokers and consider order types that reduce exposure to rapid price changes.
Frequently Asked Questions
Slippage is the difference between the expected price of a trade and the actual price at which it is executed, often caused by market volatility, low liquidity, or rapid price changes.
Slippage is primarily caused by high volatility, low liquidity, order processing delays, and market gaps that occur due to news or off-hours trading.
Market orders are more prone to slippage because they prioritize speed over price, so during volatile periods the final execution price may differ significantly from the expected price.
Yes, slippage can be positive (favorable) when the trade executes at a better price than expected, or negative (unfavorable) when the price is worse than anticipated.
Weekend or gap slippage happens when markets open after a closure period, like a weekend, and prices jump due to news or events, causing trades to execute at different prices than expected.
To reduce slippage, traders should focus on liquid markets, avoid trading during high volatility or market openings, use limit orders when appropriate, and ensure fast order execution.
Catastrophic slippage refers to extreme price gaps caused by sudden events like bankruptcy news, resulting in huge losses without the chance to exit trades at reasonable prices.
Yes, slippage can occur in various markets including stocks, forex, and futures, especially when price movements are rapid or liquidity is low.
