What Is Slippage in Trading? Definition, Causes, and How to Minimize It

Table of Contents

1. What Is Slippage?
2. How Slippage Works
3. Real-World Example of Slippage
4. Key Causes of Slippage
5. Impact of Slippage on Your Trades
6. Proven Strategies to Reduce Slippage

Key Takeaways

• Slippage occurs when the executed trade price differs from the expected price at order placement.
• It can be positive (profitable) or negative (loss-inducing).
• Primary causes: low liquidity, high volatility, and execution delays.
• Mitigation tactics: limit orders, avoiding high-volatility periods, and trading liquid assets.

What Is Slippage?

Slippage is the discrepancy between an order’s expected price and its actual execution price. It’s common in fast-moving or illiquid markets where prices shift rapidly between order placement and fulfillment.

• Positive slippage: Execution price favors the trader (e.g., buying lower or selling higher).
• Negative slippage: Execution price harms the trader (e.g., buying higher or selling lower).

👉 Learn how liquidity impacts slippage

How Slippage Works

Slippage isn’t inherently good or bad—it simply reflects market dynamics. For example:

• A market order to buy a stock at $100 may execute at $102 due to sudden demand spikes.
• A sell order during a flash crash might fill below the intended price.

Factors influencing slippage:

• Order type (market vs. limit orders).
• Asset liquidity (e.g., blue-chip stocks vs. penny stocks).
• Market conditions (news events, earnings reports).

Example of Slippage

Imagine:

1. You place a buy order for Stock X at $50/share.
2. Due to low liquidity, the order executes at $52/share.
3. Result: 4% negative slippage ($2 loss per share).

Why it matters: Over time, repeated slippage erodes profits, especially for high-frequency traders.

Causes of Slippage

| Cause | Explanation |
|---------------------|-----------------------------------------------------------------------------|
| Low liquidity | Fewer buyers/sellers → wider bid-ask spreads → higher slippage risk. |
| High volatility | Rapid price swings (e.g., during earnings) delay executions. |
| Slow execution | Technical delays or broker latency worsen slippage. |

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How Slippage Affects Your Trades

• Costs: Negative slippage increases entry/exit costs.
• Strategy impact: Scalping and arbitrage rely on precise pricing; slippage disrupts this.
• Psychological toll: Unpredictable results may deter traders.

Pro tip: Always factor slippage into risk management calculations.

Strategies to Minimise Slippage

1. Avoid volatile periods: Steer clear of major news events (e.g., Fed announcements).
2. Use limit orders: Guarantees price but may not fill (trade-off for control).
3. Trade liquid assets: Focus on high-volume stocks/ETFs with tight spreads.
4. Split large orders: Execute in smaller chunks to reduce market impact.

FAQ: Slippage Management

Q: Can slippage be eliminated entirely?
A: No, but it can be minimized with the right tactics.

Q: Does slippage affect crypto trading more than stocks?
A: Often yes—crypto’s 24/7 markets and lower liquidity amplify slippage risks.

Q: Are there brokers that reduce slippage?
A: Some offer "slippage protection" or faster execution tech (check fine print).

Bottom Line

Slippage is unavoidable but manageable. By understanding its causes and adopting preventive measures—like trading during peak liquidity hours or using limit orders—you can mitigate its impact.

Final tip: Test strategies in a demo account to gauge slippage under real conditions.

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