Slippage is the difference between the price at which you initiated a trade and the price you get once the order has been filled. To put it another way, we can define slippage as a delay that causes the price at which a trade completes to be different from the price you expect. It doesn’t matter if you are referring to the meaning of slippage in forex or in trading stocks. It’s the same thing. The important concept to understand with regards to market slippage is that timing issues create an unexpected difference in price.
Slippage Meaning in Context
To help define slippage in a more practical way, here is a simple example of what it might look like inside the eToro stocks trading hub:
Example: The buy price for Nike shares is $164.97 and you decide to buy 5 shares for a total cost of $824.85.
You hit the “buy” button and lock in the order.
However, in the time it takes for the trade to be executed (i.e., for the order to be filled), the price changes to $164.87. This means you actually paid $824.35 for 5 shares in Nike.
This is an example of positive slippage in trading. The price you paid is better than you expected. However, prices can also go the other way when we’re talking about the meaning of slippage in trading. Below is an example of negative slippage:
The price differences in this example may not be a huge issue because the number of shares being traded is fairly low. However, if you were buying 100 shares, the slippage quickly becomes more significant. Indeed, a difference of $0.10 only creates a price difference of $0.50 in the above example.
However, if you bought 100 shares, the price difference would be $10. For that reason, you need to know how to avoid slippage in forex, stocks, commodities, and ETF trading. Before we discuss slippage control measures, we need to explain why price differences can occur.
Why Does Slippage Happen in Trading?
We know that the meaning of slippage in trading refers to a difference in the price you expect and the final order price. What we have not established is why slippage happens in trading. There are three main reasons for stocks, forex, commodities, and ETF slippage:
- Market Volatility
When the market is volatile and you use market orders, such as stop order, the trade might not close in time and the stop limit may not be triggered. This is because prices can rise or fall sharply in split seconds when the market is volatile. Therefore, if the price suddenly spikes above your order limit, there may not be enough time for the software to complete the order at the desired price before it changes.
- Gaps in the Market
The second reason for slippage is when prices move sharply in one direction or another, despite little or no trading taking place in between.
- Lack of Liquidity
Slippage can also occur because there is not enough liquidity in the market to fill an order. For example, if you’re trading an exotic forex pair, there may not be enough people buying/selling at the point you want to execute a trade. This can cause a delay between the moment you place an order and the time it gets filled.
How To Avoid Slippage in Trading
You can avoid slippage in forex and other types of trading by using risk management tools. The most appropriate in this context is a guaranteed stop. This is not like a standard stop-loss. A guaranteed stop will always fill a trade at the price you want. You may have to pay for this luxury. However, the extra cost ensures that the software will always default to the price you have set, which means you avoid slippage.
FAQ
- What is slippage tolerance?
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Slippage tolerance is a risk management tool. You can set a slippage tolerance within a certain range i.e., you instruct the trading software to fill orders within two points of slippage. The tolerance you set will be based on a percentage of the trade’s value.
- What is slippage in forex?
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Slippage in forex is the difference in the bid/ask price of a currency pair.
- What is slippage in stock trading?
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When the price at which you buy or sell stocks is different from the one you expected, this is known as slippage. It is a difference in price caused by a delay between you initiating an order and the trading software filling it.
- How to avoid slippage?
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You can avoid slippage by not trading in highly volatile markets or in markets with low liquidity. You can also avoid slippage by using risk management tools such as guaranteed stops.