The Basics of Slippage

What It Is, Its Effect and Avoiding it While Day Trading

slippage on trade
Trader can't believe the slippage on her trade. webphotographeer, Getty Images

Slippage inevitably occurs to every trader, whether they are trading stocks, forex, or futures. Slippage is when you get a different price than expected on an entry or exit from a trade.

If the bid-ask spread in a stock is $49.36 by $49.37, and you place a market order to buy 500 shares, you may expect it to fill at $49.37. In the fraction of a second it takes for your order to reach the exchange something may change, or your quotes could be slightly delayed.

The price you actually get may be $49.40. The $0.03 difference between your expected price of $49.37, and the $49.40 price you actually end up buying at, is your slippage.

Order Types and Slippage

Slippage occurs when a trader uses "market orders." Market orders can be used to both enter and exit a position. That means slippage is possible when you get in and out of a trade.

To help eliminate the double-slippage possibility, traders use limit orders as well. A limit order only fills at the price you want, or better. Unlike a market order, it won't fill at a worse price. By using a limit order you avoid slippage; that's great in some cases, but not others.

For this introduction to slippage, market and limit orders are described above in their most basic functions. When trading, other order types are combined with market and limit orders to create trades based on various scenarios. To see all the order types, visit the Order Types page on your broker's website.

Entering Positions

Limit orders and stop limit orders (not to be confused with a stop loss which will be discussed shortly) are often used to enter a position. Since you don't have a position yet you can enter when you want. If you can't get the price you want then you simply don't trade. Sometimes using a limit order will mean missing a lucrative opportunity, but it also means you avoid "overpaying" to get into a trade.

A market order assures you get into the trade, but there is a possibility you will end up with slippage, getting a worse price than expected. 

Ideally, plan your trades so that you can use limit or stop limit orders to enter, avoiding the cost of unnecessary slippage on entries. Some strategies require market orders, ​though, to get you into a trade in fast moving market conditions. Under such circumstances, account for some slippage.

Exiting Positions

Since you are already in a trade, and money is on the line, you have less control than you did before you entered the trade. Money is now on the line and your profitability, while partially reliant on you, is also at the mercy of the market. For this reason, traders typically use market and limit orders, depending on the scenario.

When a trade is moving favorably, place a limit order at your "target price." Assume our trader who bought shares at $49.40 places a limit order to sell those shares at $49.80. The limit order only sells the shares if someone is willing to give our trader $49.80.

When setting a stop loss--an order that will get you out when the price is moving unfavorably--it should be a market order. This assures you get out of the losing trade.

Using a stop loss limit order will only fill at the price you want, but when the price is moving against this means your loss will continue to mount if you can't get out at the price specified. In this case, accepting some slippage is usually better than facing a growing loss.

When the Biggest Slippage Occurs

The biggest slippage usually occurs around major news events. As a day trader, avoid having trades during major scheduled news events, such as FOMC minutes or during a company's earnings announcement. While the big moves seem alluring, getting in and out at the price you want may serve problematic. If already in a position you could face substantial slippage on your stop loss, exposing you to much more risk than expected.

Check the economic calendar and avoid trading several minutes before or after announcements that are marked as high impact.

Also, check the earnings calendar, and avoid having positions in a stock when earnings are coming out. As a day trader you don't need to have positions before these announcements, take positions after. 

Unfortunately,​ surprise announcements occur which can result in slippage, large slippage. This is unavoidable. If you don't trade during major news events, most of the time large slippage won't be an issue, so using a stop loss is recommended. If catastrophe hits and you get slippage on your stop loss, you'd be staring down a large loss even if you didn't have a stop loss in place. Don't let slippage deter you from managing your risk in every way you can.

Slippage also tends to occur in markets that are thinly traded. Trade stocks, futures and forex pairs where there tends to be liquidity at every price level. This will help alleviate the possibility of slippage. Also, trade stocks and futures while the major US markets are open (if trading in the US). Trade forex when London and/or the US are open, as this tends to be the most liquid time for most current pairs (see Best Time of Day to Day Trade Forex).

Final Word on Slippage

You can't totally avoid slippage, it is a part of trading like any other cost, such as the spread or commissions. It is a cost worth paying sometimes, but not all the time. When possible, use limit orders to get into positions. Use limit orders to get out of most of your profitable trades. If you need out immediately, use a market order. When placing a stop loss, use a market order. This assures you get out of the trade. How you will exit should be planned in advance: Know These 4 Things About Every Day Trade.

Some traders don't use stop loss orders because of the possibility of slippage. In extreme circumstances, you may end up with a horrible price, but in extreme circumstances, you will likely end up with a horrible price (loss) whether you use a stop loss market order or not. Control your risk. Avoid trading for several minutes around major news announcements and large slippage can usually be avoided. Minor slippage in stocks, forex and futures is common and shouldn't have a large adverse effect on a profitable trading system

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