Slippage

Understanding Slippage

Slippage is the difference between the expected price of a trade and the price at which the trade is actually executed. It can be positive (a better-than-expected execution), negative (a worse-than-expected execution), or neutral. Slippage occurs whenever market prices change between the moment an order is placed and when it is filled — most commonly during periods of high volatility, low liquidity, or when using market orders.

Key takeaways

• Slippage can benefit or hurt traders depending on whether execution is better or worse than expected.
• It’s most likely in volatile markets, low-liquidity instruments, or when placing large orders.
• Limit orders prevent negative slippage but carry the risk of non-execution.
• Many platforms let traders set a maximum slippage tolerance to control execution risk.

How slippage happens

When you submit an order, the trade is filled at the best available price in the market at execution time. If prices move before your order is filled, the execution price can differ from the intended price. Common causes:

• Rapid price moves (news, economic releases, earnings).
• Thin order book or low market depth for the instrument.
• Large orders that exhaust available liquidity at the quoted price.
• Round-the-clock trading venues (e.g., forex, crypto) where price can change anytime.

Order types influence slippage:
* Market orders: execute quickly at the best available price and are most exposed to slippage.
* Limit orders: execute only at a specified price or better, avoiding negative slippage but risking non-execution.

Simple example

Suppose a stock shows a quoted bid/ask of $183.50 / $183.53. You place a market order to buy 100 shares expecting $183.53 per share. Before the order fills, the ask moves to $183.57, and your order fills at $183.57. That is negative slippage of $0.04 per share, or $4 total.

Slippage in forex and crypto

• Forex: Common due to high leverage, frequent news-driven moves, and round-the-clock trading. Stop-loss orders and market orders may fill at the next available rate, not the rate specified, during fast moves.
• Crypto: Often more volatile and, for some tokens, less liquid than traditional assets — increasing slippage risk.

Alternatives and mitigants in these markets include using limit orders, trading during peak liquidity windows, and using instruments (like options) to cap downside exposure during extreme moves.

Strategies to minimize slippage

• Trade during high-liquidity, low-volatility periods (avoid major news/economic releases).
• Use limit orders to control execution price (accept the risk that the order may not fill).
• Break large orders into smaller slices to avoid walking the book.
• Set a maximum slippage/tolerance percentage if your platform supports it.
• Use reputable brokers or exchanges with deep liquidity and fast execution.
• Consider advanced execution tools (algorithms, VWAP/TWAP orders) for large institutional orders.
• In volatile markets, consider hedging or using options to limit downside risk.

Common questions

What is 2% slippage?
* A 2% slippage tolerance means the order may execute up to 2% worse (or better) than the expected price. For a $100 target price, a 2% negative slippage would result in a $102 execution price.

Is positive slippage good?
* Yes. Positive slippage means you received a better price than intended.

Can stop-loss orders eliminate slippage?
* No. Stop-loss orders become market orders when triggered and can still suffer slippage in fast markets. A stop-limit order can prevent worse fills but may not execute.

Conclusion

Slippage is an inherent aspect of trading across equities, forex, crypto, futures, and other markets. Understanding when and why it occurs and using appropriate order types and execution strategies can substantially reduce its impact on trading performance.