What is Slippage and How to Avoid It
Slippage is a common challenge faced by traders in financial markets,
where a difference arises between the expected price and the actual execution price due to market volatility.
Content
- Definition of Slippage and Its Causes
- Factors Affecting Slippage
- Effects of Slippage on Trading
- Advanced Strategies to Avoid Slippage
Definition of Slippage and Its Causes
Slippage refers to the difference between the expected price for executing a trade and the actual price at which it is executed.
This discrepancy occurs due to rapid market movements during the processing time of the order.
Slippage is commonly observed in low-liquidity markets or during periods of high market volatility
caused by economic news releases or unexpected events.
There are two main types of slippage:
- Positive Slippage: When the actual price is better than the expected price, benefiting the trader.
- Negative Slippage: When the actual price is worse than the expected price, leading to losses or reduced profits.
Factors Affecting Slippage
- Market Liquidity: Low liquidity can result in fewer matching orders, increasing the likelihood of slippage.
- Volatility: Rapid price movements create instability, raising the chances of slippage.
- Type of Order Used: Market orders are more prone to slippage compared to limit orders.
- Execution Time: Delays in order execution increase the risk of price changes.
Effects of Slippage on Trading
- Reduced Profits: Negative slippage can shrink the expected profits from a trade.
- Increased Losses: If a trade is near loss, negative slippage can worsen the outcome.
- Psychological Impact: Frequent slippage can lead to frustration and diminished confidence among traders.
Advanced Strategies to Avoid Slippage
- Using Trailing Stop Orders: These help adjust prices automatically in line with market movements.
- Trading with Demo Accounts: Test new strategies without risk to understand the effects of slippage.
- Utilizing Market Analysis: Keeping up with news and market trends helps identify the best times to trade.
Final Tips
While slippage is an unavoidable part of trading, understanding its causes
and working to mitigate its effects can make a significant difference in the success of your strategies.
Conscious trading and proper planning are key to avoiding the pitfalls of slippage.