What Is Slippage in Trading?
Slippage is a critical concept in trading that refers to the difference between the expected price of a trade and the actual execution price. This discrepancy often occurs during periods of market volatility or when using market orders.
Key Takeaways:
- Slippage can be positive, neutral, or negative.
- It affects all markets: forex, stocks, bonds, and cryptocurrencies.
- Limit orders help minimize slippage compared to market orders.
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How Slippage Works
When you place a trade, there’s a slight delay between order submission and execution. During this time, price movements—especially in volatile markets—can cause slippage.
Types of Slippage:
- Positive Slippage: Execution price is better than expected (e.g., buying at £98 instead of £100).
- Negative Slippage: Execution price is worse (e.g., buying at £102 instead of £100).
- Neutral Slippage: No difference between expected and actual price.
Pro Tip: Use limit orders to lock in prices and avoid unexpected slippage.
Slippage Across Different Markets
Forex Trading
- Common during high volatility (e.g., news events).
- Less liquid currency pairs (e.g., exotics) experience more slippage.
Stock Trading
- Sudden bid/ask spread changes cause slippage.
- Avoid trading during earnings announcements or market opens/closes.
Cryptocurrency Trading
- Extreme volatility leads to frequent slippage.
- Low-liquidity altcoins are particularly prone.
How to Minimize Slippage
1. Trade in Liquid Markets
- High-volume markets (e.g., major forex pairs, large-cap stocks) reduce slippage risk.
2. Use Limit Orders
- Set a fixed price for execution instead of accepting market rates.
3. Avoid Volatile Periods
- Skip trading during major economic releases or overnight gaps.
4. Adjust Slippage Tolerance
- Set a 2% tolerance threshold to balance price flexibility and risk.
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Slippage Tolerance: Why It Matters
Slippage tolerance defines the acceptable price deviation for your trades. For example:
- 2% tolerance means paying up to £102 for a £100 stock.
- Helps brokers execute orders faster while capping losses.
Note: Wider tolerance suits volatile markets; tighter tolerance works for stable assets.
FAQ
Q: Is slippage always bad?
A: No—positive slippage benefits traders, while negative slippage hurts profitability.
Q: Can slippage be eliminated?
A: No, but it can be managed with limit orders and liquid markets.
Q: Does slippage affect long-term investors?
A: Minimal impact for buy-and-hold strategies; more relevant for active traders.
Q: Why does crypto have high slippage?
A: Due to thin order books and rapid price swings in low-cap tokens.
Conclusion
Slippage is an unavoidable part of trading, but understanding its mechanics empowers you to mitigate risks. Focus on:
- Liquid markets
- Limit orders
- Strategic timing
Equip yourself with these tools to navigate volatile markets confidently.
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