Slippage is the difference between the expected price of trade, and the price at which the trade is ultimately executed. For instance a trader may want to go long in the EUR/USD executing a buy order at 1.3580 but the order is actually fulfilled at a price of 1.3582, in this example the price slipped 2 pips from the price the order was originally placed at. Slippage can also occur when closing out a position manually or when a trader uses stop loss or trailing stop, as it may not be possible to execute the order at the quoted or stop price.
Slippage is more likely to occur during periods of high market volatility, though slippage can occur during periods of low market volatility. What is not often mentioned is that slippage can work in your favour as well as against you. In the second example you can see that slippage worked in our traders favour with our trader getting a favourable entry price.
Why Does Slippage Happen?
- Market Volatility: During periods of significant market volatility slippage will often occur, as quoted prices will be changing with considerable frequency. Traders will often encounter significant amounts of slippage during a news release with prices changing almost instantaneously. This means that by the time a traders order is processed the quoted market price has already changed. Slippage is generally less noticeable during periods where the market is less volatile with prices being more stable
- Latency: The speed of your internet and the broker’s servers can also be one reason why slippage can occur. Once you have placed your order via your trading platform, the order is then sent to your brokerages servers who will generally send the trade through to one of their liquidity providers. If the latency between a brokerage and their customer is particularly high it may take some time for the order to fully processed which can lead to some slippage. Thankfully latency times continue to improve with many brokerages working hard to ensure their clients have a fast connection with the firm. Latency can be a bigger factor when using social trading services such as ZuluTrade.
- Liquidity: Lack of liquidity can lead to slippage. If a trader places an order and there is not enough liquidity to fulfill an order at the quoted price. A trader placing a 50 lot trade may experience some slippage with it not being possible to fulfill the entire order at the quoted price. The majority of retail traders won’t be placing trade sizes that cannot be executed at the quoted price and therefore it is more likely that retail traders will experience slippage for other reasons.
- Broker Manipulation: While this is particularly rare some unscrupulous brokerages have been known in engaging in practices which cause asymmetric slippage. By deliberately delaying orders brokerages have been able to pass on slippage to customers only when it works in their favour. The Virtual Dealer Plugin for MetaTrader caused a lot of controversy, as it allowed for brokerages to delay orders and only pass on slippage when the market moved in their favor.