The Academy of Financial Trading
Slippage explained
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Risk Warning
What exactly is meant by Slippage when trading?
Slippage is essentially a delay in order execution or liquidation when trading financial markets
Slippage explained
Slippage
To fully understand this, we believe it would be useful to understand the process an order must go through in order to be in a live trade
We can use pending orders or market execution orders, but both have one similarity – they are set to enter the market at a given price and it most cases exit at a set price.
There is a simple three stage process involved.
Slippage
The Order Process or Lifecycle
We must first place the order with our brokerage, specifying the prices we wish to enter at and exit.
Our broker then passes our order to their liquidity provider.
It is then placed to the market via the liquidity provider, on our behalf.
Slippage explained
Where can slippage come from?
Slippage can come form very large movements that have not got a constant flow of buyers and sellers and hence our order is literally ‘slipped’ a few extra pips
It would be useful to imagine that slippage happens when there is a gap of buyers and sellers between two market prices
There is therefore a gap in which we cannot have liquidate or place an order at a given price.
Slippage
It might be useful to compare it to a gap in a road on which we’re driving in our car where we can get no friction – same concept.
Slippage explained
Slippage
An ExampleLet us imagine that we placed a trade on Crude Oil just before the inventory announcements were released.
Let us assume here also that our exit point or stop loss is missed during the large movement in price and is hence ‘slipped’
Let us switch to the platform to illustrate this
We can conclude that it is certainly favourable to mitigate slippage – that’s why trend trading works best
Our slippage is then less in percentage terms of our winning positions
To completely bypass slippage you would most likely have to have a direct connection to the market – something that’s very expensive and only viable for those willing to purchase expensive IT tools for the same
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