DEFINITION of Slippage
Slippage in the trading of stocks often occurs when there is a change in spread.
WHAT IT IS IN ESSENCE
In this situation, the trader’s market order may get executed at a less favorable price than originally expected. In the case of a long trade, the ask may have some increase.
Slippage represents situation when the price at which trader’s order is executed does not match the price at which it was made.
If slippage happens on a stop, it may not be triggered at the level at which it was set.
Slippage happens when the market moves suddenly against trader’s order. And in the time it takes for the broker to process the order.
In such circumstances, the original price is no longer available.
Slippage is more likely to occur in periods of high volatility, but honestly, it can occur at any time.
For instance, the trader has an open position on a market that closes over the weekend. When the market reopens on Sunday evening, it is trading at a much lower price than it had been on Friday.
HOW TO USE
If the trader has a stop between these two prices, it will not be filled while the market is shut. Hence, such an order would be filled at a worse price than expected.
Orders prone to slippage:
- Market orders, where the broker is authorized to make a trade at the best available next price. This can be overvalued for large market orders when finding liquidity can be hard.
- Stops and limits, when a fast price movement makes it impossible to carry out a trade at the price specified in the order.
How to avoid this?
The best way is to plan out trades well in advance. Or to make use of risk management tools like guaranteed stops that eliminate the risk of slippage.
A guaranteed stop will always complete trades at the price at which trader has set them. If stop loss is triggered, there will be a small premium to pay in addition to normal transaction fees.