Slippage Explained

Don’t you wish you could see the future? 

Everyone does sometimes – especially when making trades in the stock or forex market. 🧙‍♂️

Even if we can’t totally predict whether a certain stock will go up or down, we at least expect that if we say we’ll buy it at a certain price, that’s the price we’re going to get. 

Unfortunately, it doesn’t always happen that way. You might have experienced this already – sometimes, you order a trade at a certain price, but it gets executed at a different price. This is called “slippage” – and it can be a frustrating surprise for new traders.

Slippage is most likely to occur in volatile markets – which we’re currently in, as the CBOE Volatility Index has been on the rise. But there are other scenarios where slippage is likely to occur. If you want to be precise in your trades, it’s an important concept to understand.

If you want to take more control of your trading, read on for everything you need to know about slippage. We’ll cover what it is, give some examples, and help you manage it in the future. Avoiding slippage isn’t your only priority when you’re trading in the stock and forex market, so we’ll help you find a balance that works for your bottom line.

Sound good? Let’s dive in. 👇

What you’ll learn

• What is Slippage in Trading?
• Example of Slippage
• How to Avoid Slippage
• The Impact of News
• Slippage in the Stock Market
• Slippage in Forex Trading
• Conclusion
• Get Started with a Broker

What is Slippage in Trading? 🔎

Say you ask your friend to buy you a banana for $10 (yes, that’s a Lucille Bluth reference). Your friend agrees and takes your credit card to the grocery store. But by the time your friend actually gets to the store, the price of bananas has risen to $15. Your friend already has your credit card and your permission to use it – so they don’t check with you a second time, they just go ahead and buy the $15 banana. 

Well, when that happens with securities, it’s called “slippage.” Whenever you order a trade at one price and it gets executed at another price, slippage has occurred. But prices can get a whole lot higher than $15, and instead of your friend, this process involves a broker that might feel distant and mysterious. Even if you’re in the early stages of learning about the stock market, or finding your footing just starting to trade forex, you’re bound to encounter slippage sooner rather than later. 

Slippage is more likely in volatile markets. This is because the price is more likely to change between when you order the trade and its execution. It can also happen if you execute a large order that doesn’t have enough volume at the initial price to account for the bid/ask spread. 

Whether you end up paying more or less than you bargained for, it’s still slippage. We tend to complain about it more when we pay more than we wanted to, but it’s still considered slippage if you pay less. If you’re trading a highly volatile currency like Bitcoin, can dip 15% over the weekend, you’re bound to experience slippage.

Example of Slippage 👇

Let’s move on from our banana example and into the stock market. Let’s say you want to buy Apple stock, which is currently trading at $134.32. Maybe you’re stoked about the new iPad Pro or some other cool gadget, and you want to get in on the action. But of course, Apple’s stock price is always changing.

Ordering trades is not an instantaneous transaction. There are little elves in your stock trading app that have to do all kinds of work to make things happen for you. (Just kidding…probably. 🧝) While those elves are at work trying to buy the Apple stock, anything could be happening to its price. 

Let’s get a little more specific and a little less North Pole. Once you order the trade, one of three things could happen. You could have no slippage, negative slippage, or positive slippage. 

No Slippage ✅

You ask for one share of Apple at $134.32. And you’re in luck! When the order is filled, that’s the price being offered, and you get one share of Apple stock at $134.32. That’s the dream! Especially if you’re the kind of person who meticulously tracks their purchases, and you don’t want to change the entry in your spreadsheet for this transaction.

Negative Slippage 📈

Instead, let’s say the price has gone up by the time your order gets filled. You wanted to buy a share for $134.32, but now it’s $136. You have to pay an extra $1.68 for your share. This is called negative slippage because it costs you more money—if you were short AAPL, this would be considered positive slippage. 

Positive Slippage 📉

Now, let’s say the price has already dropped by the time it’s filled. You asked to buy Apple for $134.32, but it gets purchased for $133.50. That’s 82 cents cheaper than you meant to buy it for – so you’re getting a better price.

That’s called positive slippage because there’s more money in your pocket. Again, if you had a short position against Apple, this would be considered negative slippage because you want the price to go down as much as possible.

How to Avoid Slippage 💡

So how do you keep slippage from happening? Since slippage happens when you’re using market orders, managing these orders is usually the answer. Market orders will execute your trade, regardless of what happens to the price of the security in the meantime—This can cause slippage if the security price changes. 

One easy way to avoid slippage is to use a limit order instead of a market order. The top stock brokers will offer market and limit orders, as do the majority of regulated, trustworthy forex brokers. Limit orders will only enter or exit your position at the price you want – or an even better price. A market order will go even at a worse price. 

While a limit order keeps slippage from happening, it will only go forward if the security reaches your price point. Now, this might be good if you definitely don’t want to go higher than a certain price for your intended security. But would you really pass on the next big thing because you had to pay $100 instead of $90? 

I mean, if that’s going to skyrocket to $300, it doesn’t really matter, right? Limit orders should be carefully planned so that you can get the most bang for your buck without shooting yourself in the foot. (Is that a mixed metaphor? We’re not sure.)

Opening Trades 📂

When you’re entering a position, you’ll often use limit and stop-limit orders. This will keep you from trading if you can’t get the price you want. You might miss out on some exciting opportunities this way, but you’ll also avoid slippage—it’s all a matter of balance and priorities. 

A market order will make sure that you get the trade you want, but not necessarily at the price you want. If possible, you should plan your trades carefully using limit orders that will still get you in the door when it’s lucrative. If you go with a market order during a volatile market, just be prepared for slippage to happen. 

Closing Trades 📁

Since you already have money at stake when you’re exiting a position, you don’t have as much control as you do when you’re entering a position. Market orders may be necessary to quickly close something out, though you can use a limit order if you’re confident that better market conditions are on their way. 

If you’re using a stop-loss, which will get you out of a position that’s tanking, you’ll have to use a market order. A stop-loss is more about damage control than waiting for the perfect moment to sell. If your position is quickly moving against you, it’s more important to get out of there than to match a specific price through a limit order. 

Watch Out for Major News Events 📰

We probably aren’t the first people to tell you that the news affects the marketplace. One day the stock market can go down after Biden’s announcement to raise capital gains tax. On the forex end of things, things can go the same way—but major geopolitical news is very important. For example, Russia’s ruble is volatile through tensions on the border with Ukraine.

You might want to avoid market orders when big news is announced, or right when a company is announcing its earnings. The ensuing volatility can make it hard to get the price you want. You can check the earnings calendar to avoid trading when companies are making major announcements. 

Keep an Eye Out for Announcements 📺

If you are a day trader, you might want to open a position right after these announcements. Take advantage of the market volatility while avoiding slippage by waiting until right after the announcement to enter your trade. Still, you might encourage some slippage, and this can add up over a high volume of trades.

If you’re not day trading stocks or scalping forex, then you can just avoid trading during big news events. This will keep you from having a large or unexpected slippage. You can just use a stop-loss order to make sure you get out if your assets move against you. 

Slippage in the Stock Market 🏛

Slippage can work a little differently in the stock and forex markets. In the stock market, slippage usually happens when the bid/ask spread changes. In case you forgot, a bid/ask spread is the difference between the ask price and the bid price – in other words, the difference between the highest price a buyer will pay, and the lowest price a seller will accept. 

If you’re placing a long trade, the ask price might increase before your trade is executed. This means you pay more for the asset – negative slippage occurs. The more volatile a stock is, the more likely you will have some slippage. 

Slippage in Forex Trading 💱

In forex, slippage happens when the order is placed at a less favorable rate than the one you initially asked for in the order. When trading volatility is high, it’s very hard to place an order at a specific price in the forex market. Limit orders are the only way to completely keep this from happening, but you run the risk of your trade not happening at all. 

More liquid currency pairs will be less prone to slippage. Right now, that’s pairs like EUR/USD and GBP/USD but even these can become prone to slippage in particularly volatile market conditions—for instance, EUR/JPY has had growth of over 0.5% per day, which is rare for such a popular and commonly non volatile currency pair. 

Conclusion

Now you have what you need to know to handle slippage in your trades! Remember, avoiding slippage entirely may not be worth it – you might find yourself boxed out of lucrative trades by waiting for the perfect price. However, using limit orders instead of market orders can be a good idea if you want to minimize slippage in trades where you feel confident your security will reach your ask price. 

Make sure you know when major announcements are coming out, or when the markets are particularly volatile. This way, you can make your trades in more stable conditions and avoid slippage. No one can have complete control over their trades, but by understanding slippage, you can make more informed decisions. Happy trading! 

Get Started with a Broker

Most stock brokers will offer market and limit orders which help to minimize slippage. Here are a few brokers trusted by traders around the globe:

Fees

Minimum initial deposit

$0

TS Select: $2,000

TS GO: $0

Commissions

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Account minimum

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$0

General

Highlight

Huge discounts for high-volume trading

Powerful tools for professionals

Best for

Active traders

Active options and penny stock trading

Promotion

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Rating

8.0/10 Visit Interactive Brokers on Interactive Brokers' website

8.0/10 Visit TradeStation on TradeStation's website

Fees

Minimum initial deposit

TS Select: $2,000

TS GO: $0

$0

Commissions

$0

$0

Account minimum

$0

$500

General

Highlight

Powerful tools for professionals

Low fees

Best for

Active options and penny stock trading

Beginners and mutual fund investors

Promotion

50% Off Future

Rating

8.0/10 Visit TradeStation on TradeStation's website

9.5/10 Visit Firstrade on Firstrade's website

Fees

Minimum initial deposit

$0

TS Select: $2,000

TS GO: $0

$0

Commissions

Vary

$0

$0

Account minimum

$0

$0

$500

General

Highlight

Huge discounts for high-volume trading

Powerful tools for professionals

Low fees

Best for

Active traders

Active options and penny stock trading

Beginners and mutual fund investors

Promotion

50% Off Future

Rating

8.0/10 Visit Interactive Brokers on Interactive Brokers' website

8.0/10 Visit TradeStation on TradeStation's website

9.5/10 Visit Firstrade on Firstrade's website

About the author

Tim Fries

LinkedIn Email

Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.