Slippage: What It Means In Trading

This article adds key details around what exactly slippage in trading is and its causes, the different types like positive/negative and order-based slippage, factors that exacerbate it like illiquidity and volatility, how slippage varies across different asset classes, specific tactics to manage slippage risk, and the importance of calculating and monitoring slippage metrics.

What is Slippage?

Slippage refers to the price-difference between the execution price of a trade and the real trade execution price. It results in a trader getting a worse entry or exit price than intended and is essentially an inherent cost that eats into potential profits or increases losses on a trade. The main causes of slippage include delays in order execution, lack of liquidity, and a volatile market.

Types of Slippage

There are two main types of slippage in trading – positive and negative. Positive slippage occurs when the execution price is better than expected, while negative slippage happens when the fill is worse than desired. The risk of slippage also differs based on order type, with market orders having higher slippage risk than limit orders that can control fill price.

Factors Affecting Slippage

Key factors that increase the risk of slippage include low liquidity environments with fewer shares trading hands, high volatility causing rapid price fluctuations, and placing large order sizes that are difficult to fill at desired levels.

Slippage in Different Markets

Slippage impacts different markets to varying degrees based on their relative liquidity. It tends to be higher in thinly traded stocks, forex due to high leverage, futures depending on contract volumes, and cryptocurrencies, given their decentralized, volatile nature.

Managing Slippage Risk

While eliminating slippage fully is impossible, there are techniques to help manage and control it. These include utilizing limit orders, breaking up larger orders into smaller incremental sizes, as well as carefully timing entries and exits to avoid volatile periods.

Calculating and Monitoring Slippage

To get a handle on slippage impact, it’s recommended to track and monitor average slippage across trades over time. Calculating the slippage amounts and comparing them to overall strategy performance can reveal whether the slippage levels experienced are acceptable or need to be reduced.

Alexander Voigt, CEO
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Alexander Voigt is the founder of DayTradingZ, was a regular contributor to Benzinga and has been featured and quoted on leading financial websites such as Investors.com, Capital.com, Business Insider and Forbes.