Today we are going to talk about price slippage. A very popular topic in trading forums. What is slippage? Why does price slippage occur? Is it normal? Are there positive slippages? How can slippages be avoided?
Slippage occurs when the actual execution price differs from the expected price of the order. As a result, the execution price of the order differs from the price at which it was sent. For example, a trader sent a buy order at 1.5005, and the price was executed at 1.5010. The order was executed 5 pips lower than the original price.
Why does price slippage occur?
There must be a buyer and a seller for a trade to be executed. For example, if someone tries to sell 1 lot at 1.5005, the counterparty (the other party to the trade) must be willing to buy at 1.5005 for the same volume. Otherwise, the order will be executed at the next available price. Let's look at the example below to make it easier to understand.
But first, you need to remember the key rule of order execution.
- A buy market order is always executed against a sell limit order.
- A sell market order is always executed against a buy limit order.
A limit order excludes the possibility of execution at a less favorable price than the limit order. However, its execution is not guaranteed.
A market order is an instruction to immediately buy or sell an asset at the current market price. A market order guarantees immediate execution but does not guarantee the current price and may be executed at a lower/higher price.
In the upper part in pink are the limit sellers (ask). The lower blue area shows the limit of buyers (bid). The difference between the closest buyer and seller will be the spread for the instrument. The Volume column shows the number of lots available at a given price. For example, at the price of 25092, there are 12 lots for sale. And at the price of 25074, there are 3 lots for buy limits. Now imagine that someone buys 17 lots with a market order. What will happen? The price will start executing limit sell orders until all 17 lots are filled. The first price to sell is 25089. Price will execute 1 lot at 25089, 1 lot at 25090, 2 lots at 25091, 12 lots at 25092, and another 1 lot at 25094. This will bring the price up to 25094 with 2 additional lots remaining at this price. Thus, the initial price before buying was 25089, and after the purchase, it became 25094, with a slippage of 5 pips.
For instance, price slippage is normal if a trader is trading an illiquid instrument or trading a large volume, or both.
Why does slippage occur at such liquid instruments as the EURUSD or XAUUSD?
This often happens when important macroeconomic data or news is released. As a rule, market algorithms withdraw their limit orders before such events, resulting in a lack of market depth and a sharp decrease in liquidity at the nearest available prices. This leads to a sharp increase in volatility, resulting in a widening of the spread and price slippage. Slippage can also occur during the opening of the market on Monday due to the price spread. As a result, slippage can increase in the above-mentioned situations.
Are there positive slippages?
Yes. This can happen, for example, when a market order is bought, but the best available price is lower than the asking price due to a sharp price movement.
How to protect your trades from slippage
Traders must understand that slippage is a market situation that occurs when there is no liquidity on an instrument. Therefore, when trading according to the news, the trader must understand that they will be slipped in most cases. A stop loss is a market order, which is why a stop loss during the news may trigger a slippage. Traders should be aware of potential volatility and take proper risk mitigation measures.
Have a good trade.