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Slippage in trading is when an order is filled at a different price than the one expected. It tends to have a negative connotation, but slippage can also be favourable, resulting in getting a better-than-expected price. Slippage can occur when spread betting or trading contracts for differences (CFDs) on a range of financial markets, such as stocks or forex.
Keep reading to learn more about slippage in trading, some things that may cause it and how to avoid it. Slippage is an inevitable part of trading, but by learning about some best practices, you may be able to minimise it.
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What is slippage in trading?
Slippage is the difference between the price at which an order is expected to be executed and the final price at which it is actually executed. There is positive slippage, which is when a trader or investor gets a more favourable price, and negative slippage, when the trader gets a worse-than-expected price.
A small amount of slippage is a common market occurrence because the bid and ask prices of an asset are constantly changing.
Assume a buy order is placed. There are three possible outcomes:
- No slippage – the trader buys the asset at the exact price expected.
- Positive slippage – they pay a lower price than expected because the price dropped just before their order was executed.
- Negative slippage – they pay a higher price than expected because the price rose just before their order was executed.
Slippage can occur on market, stop and limit orders. However, limit orders can cap the price being bought or sold at, which helps to reduce negative slippage.
What are the causes of slippage?
Here are some of the main causes of slippage when trading:
- The price changes as an order is executed. The bid and ask price may change at the exact second an order is processed, resulting in a slippage.
- The greater the volatility, the greater the chance for slippage is and the larger the slippage may be if the price is moving quickly or seeing big moves.
- There is not enough liquidity at one price level to fill the order, so the order proceeds to the next level (with market and stop orders) or to the limit price (with a limit order). For example, a person wants to buy 200 shares at a price of £10.50, but there are only 100 shares available at that price. If they use a market order, they may receive 100 shares at £10.50, and the next 100 shares at £10.51 (most likely) in an actively traded stock.
- Gapping prices can also cause slippage. Gaps can occur any time there is a significant news announcement or when markets close and then reopen at a different price. Stocks often have gaps from one day to the next, and forex prices may have gaps following news announcements or over the weekend.
Examples of slippage
Let’s look at a couple of spread betting examples of slippage, using different order types.
Assume a trader wants to open a long position on Tesla stock and it is trading at $751.35 (offer price). They place a market order, and the order fills at $751.30. That’s a positive slippage, as the trader got a better price than expected.
However, next assume the order fills at $751.43. That’s a negative slippage because they got a slightly worse price than expected. This could’ve occurred because the shares being sold at $751.35 were no longer available when the order reached the market, so the order looked for the next available price to buy at, which in this case was $751.43.
The trader could also use a limit order to control the price they pay. For example, they could place a buy limit order at $751.35, which caps the price paid. This would mean that the order will only be carried out if someone is willing to sell at or below $751.35.
Now, assume the trader who bought the shares wants to place a stop-loss order on the trade at $745. If the bid price falls to $745 or below, then the stop-loss (sell order) is executed. Once again, there is the potential for slippage, either positive or negative, depending on the bid price that is available to sell to at the time the order is executed.
It’s worth noting that we also offer guaranteed stop-loss orders which guarantee to exit a trade at the exact price you want, regardless of market volatility or gapping.
Let’s look at one more basic example when spread betting in the forex market. Assume a trader wants to sell (short) the EUR/USD, and the price is at 1.20200. They want to sell only if the price drops below 1.20000. Therefore, they place a sell stop order at 1.19999.
If the bid price becomes 1.19999 or below, the order is executed to sell. If, due to market volatility, the bid moves to 1.19996 at that time, the trader will experience 0.3 pips of negative slippage. On the other hand, the bid may increase the moment the order is executed and jump back up to 1.20003. In that case, they get a better price than expected by 0.4 pips.
If the trader then placed a stop-loss on this trade, the same concepts apply to that order.
How can I avoid slippage in trading?
Remember that slippage isn’t always bad. It can also result in more favourable prices on some orders. That said, here are some ways to minimise slippage in trading.
- Guaranteed stop-loss orders. These are a good way to make sure you don’t lose more than expected due to slippage. This type of order is most used in volatile conditions or volatile assets.
- Boundary order. A boundary order sets precise parameters on an order that it will only execute exactly at, or within a certain amount of, a specified price.
- Trading with a broker that has great execution speed. The quicker the process between when the order is placed and when it reaches the market, the less slippage there will be. If execution speed is slow, that gives more time for the price to change and thus more slippage potential. We’ve been continually improving our execution and have a median execution time of just 4.5 milliseconds*.
- Trading in less volatile markets. Volatile assets make big price movements quickly, which usually increases the probability of slippage. Less volatile markets and conditions tend to have less slippage.
- Highly liquid markets. Stocks and other assets that have lots of volume (high liquidity) tend to have less slippage than assets that have little volume. Assets with little volume tend to have larger bid/ask spreads. If the bid or ask changes as an order is being processed, the next bid/ask price may be some distance away, resulting in slippage.
- Avoid trading during volatile market events. News events, such as earnings announcements for stocks or economic data releases when forex trading, can cause rapid price changes and gaps.
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FAQ
How do I calculate slippage?
Slippage is the difference between your order price (or expected price) and the actual price you end up buying or selling at. Read more about changing bid and ask prices.
Do you get slippage when trading in a demo account?
Slippage can still occur when trading on the financial markets using a demo account, although this will not impact you as much as you will be trading with virtual funds. Open a demo account now to start practising with spread bets and CFDs.
*0.0045 seconds. CFD median trade execution time, 2019-2020 CMC Markets financial year.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circ*mstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
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