Slippage occurs when a trader settles for a price different from the intended execution price. It’s when the bid/ask spread changes between when the broker submits the order and when the exchange is executed.
It tends to happen in financial markets with heightened volatility or low liquidity, but there are some other causes that you have some degree of influence over (more on that shortly).
Let’s take a closer look at how and why slippage occurs.
(Related: eToro Review: Pros, Cons, Fees & Verdict).
Negative Slippage Versus Positive Slippage.
Before we run through an example of slippage in trading, we first must distinguish between positive and negative slippage.
Any difference, positive or negative, between the intended execution price and the actual execution price qualifies as slippage.
- Negative slippage occurs when the price difference gives you a worse rate.
- Positive slippage occurs when the price difference gives you a favourable price.
Slippage happens in every financial market, such as futures, forex, bonds, and share trading.
(Related: Is MetaTrader 4 Better Than MetaTrader 5?)
Causes Of Slippage In Trading.
The three main causes of slippage are largely outside your control, but knowing about them means you can alter your investment strategy if needed.
|This is the main cause of slippage, caused by sudden surges in the buying or selling of an asset where market makers are scrambling to fulfil orders.
|This refers to how quickly an asset can be bought or sold, depending on the supply and demand. Assets in low demand are less liquid, and trades are harder to execute when there are fewer market participants.
|When traders hold or execute positions after the markets close, slippage sometimes occurs when the market reopens, often due to major news events and economic data releases since the market closed.
A lesser-known issue that contributes to slippage is internet speed. Download speeds of 25Mbps are the minimum recommendation for experienced traders.
Example Of Slippage In Trading.
Let’s say you buy some shares on the Australian Securities Exchange of National Australia Bank (NAB), and the requested price per share is $30.00.
But in light of rising interest rates, the news events trigger a huge sell-off during a volatile trading day.
- You submit a market order of $30.00 per share for 20 shares, as quoted.
- But since submitting the order, the market price has dropped to $29.50 per share.
- In paying the lower price, you’ve gained $10.00 more than you anticipated ($0.50 x 20).
This price change happens within seconds.
(Related: How To Trade Commodities In Australia).
How To Calculate Slippage.
Calculating slippage is super simple. It’s literally the difference between your expected price and the actual price you end up buying or selling at.
It’s good practice to analyse your slippage from previous trades.
Most online share trading platforms show this in your trade history, but you might have to do some quick calculations in a spreadsheet.
If you use a third-party platform like MetaTrader 4, only the actual execution price will show in your trading history (the quoted price won’t).
How To Minimise Slippage In Trading.
While you can’t avoid experiencing slippage completely, you can implement a few practices to lessen its influence over your trades.
- Set a slippage tolerance. This setting in online platforms enables you to limit the price range at which you’re willing to buy or sell. If you don’t set a price tolerance, your broker will accept the next best price. An acceptable tolerance is anywhere between 0.10% and 2%.
- Implement guaranteed stop-loss orders and limit orders. GSLOs are a type of limit order executed at a specified price you determine regardless of slippage, but they attract a premium.
- Use a broker with superb execution speeds. Brokers like Pepperstone and Vantage boast lightning-fast execution speeds of 0.02 seconds, and 99.83% of trades are executed in less than a minute.
- Avoid volatile markets and asset classes such as cryptocurrencies, commodities, less popular currency pairs, and meme stocks like GameStop. Invest in highly liquid markets instead, such as major currency pairs and stocks on the Australian Securities Exchange (ASX).
- Upgrade your tech. Use a fast internet browser like Chrome or Edge; ensure you have reliable internet speeds of at least 25Mbps; invest in a laptop or smartphone with a processor speed above 3.50GHz. You can’t go wrong with the AMD Ryzen 5 and Intel i5 series.
(Related: How To Day Trade In Australia).
What Does The Intelligent Investor Say About Slippage?
You may be here because you’ve been short-changed a few pips.
But the renowned author of The Intelligent Investor, Benjamin Graham says,
Imagine what he’d have to say about second-to-second fluctuations.
(Related: How To Buy Tesla [TSLA] Stocks).
Unless you’re scalping (profiting off small price changes and fast reselling), try not to get too emotional about the incremental price movement of an underlying asset.
Besides, don’t forget that slippage works both ways, and you might benefit from a better price – depending on the asset’s price movements.
The difference between the expected price and the specified price of your trade.