Slippage is a common phenomenon in trading that occurs when an order is executed at a price different from the expected or requested price. This difference arises primarily due to market volatility and liquidity conditions at the time the order is placed. While slippage is often seen as a minor annoyance, it can significantly impact trading performance, especially for traders operating in fast-moving markets or using high-frequency strategies.

To understand slippage, consider how orders are executed. When you place a market order, you are instructing your broker to buy or sell an asset immediately at the best available price. However, the best available price can change between the time you submit your order and when it is filled. This delay, even if measured in milliseconds, can lead to execution at a price worse (or sometimes better) than expected. This difference is what is referred to as slippage.

Formula:
Slippage = Actual Execution Price – Expected Price

If you expected to buy a stock at $100 but the order fills at $100.10, the slippage is +$0.10. For a sell order, if you expected $100 but the order fills at $99.90, the slippage is -$0.10.

Slippage is most common during periods of high volatility or low liquidity. For example, economic news releases often cause rapid price swings, making it difficult for brokers to fill orders at expected prices. Similarly, trading thinly traded assets or during off-market hours can increase the likelihood of slippage due to fewer participants and wider bid-ask spreads.

A real-life example can illustrate this better. Imagine you are trading the EUR/USD currency pair via a Forex broker. You see the current price quote at 1.1200 and decide to place a market buy order expecting to enter at that price. However, just as your order is processed, a major economic report is released showing better-than-expected employment data. The price spikes to 1.1210 before your order is filled. Your execution price is 1.1210 instead of 1.1200, resulting in a slippage of +10 pips. While this might seem small, if you are trading large volumes or scalping, such slippage can erode profits.

One common misconception is that slippage always works against traders. While negative slippage—where you get a worse price than expected—is more frequent, positive slippage can occur. For instance, in fast-moving markets, sometimes the price moves favorably before your order is filled, allowing you to enter or exit at a better price than anticipated.

Another misunderstanding is that slippage only affects market orders. While market orders are more susceptible, slippage can also occur with stop-loss and take-profit orders. Since these orders become market orders once triggered, they can also be filled at prices different from the stop or limit levels, especially in volatile markets.

To manage slippage, traders often use limit orders instead of market orders. A limit order specifies the maximum price you are willing to pay (for buy orders) or the minimum price you are willing to accept (for sell orders). This approach ensures that you never experience worse-than-expected prices, but it comes with the risk of the order not being filled if the market moves away from your limit.

Some traders also consider the average slippage in their strategy performance calculations. For example, if your average slippage per trade is 2 pips, you should factor this into your expected profit and loss. This realistic approach helps in setting more accurate risk management parameters.

Related queries often include: “What causes slippage in Forex trading?”, “How to reduce slippage in stock trading?”, and “Is slippage avoidable in CFD trading?” Understanding that slippage is a natural part of trading, especially in fast or illiquid markets, helps set realistic expectations and better trading discipline.

In summary, slippage is the difference between the expected price of a trade and the actual execution price, influenced by market volatility and liquidity. It can affect all types of orders but is most common with market and stop orders. Being aware of slippage and incorporating strategies to manage or mitigate it can improve overall trading outcomes.