The risk of slippage in trading
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What is slippage?
Slippage is the price difference between the price at which you want to buy or sell, and the price at which your order is executed on a trading platform. This is due to the asset’s price change during the time between the transmission of your order to the market and its execution. Slippage is a common phenomenon in Forex and other financial markets (derivatives).
Causes of slippage
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Increased volatility
: In times of volatility, price changes can be sudden and very rapid. This happens with important economic announcements. In a second, the price can vary by several dozen points. This period of time is sufficient to create significant slippage risk during the transmission of your order to the market. Effectively, by the time your order is transmitted to the market, the price of the asset has changed. The order is therefore be executed taking into account this new price.-
Slow trading platform
: Some trading platforms (notably those developed internally by brokers) are not very responsive. The latency time between the time the trader clicks to place his order, and the time the order is transmitted to the market increases. Whatever the platform, there is always a moment of latency. During this time, the price of the asset may change.-
Trader's slowness
: Price fluctuations can be extremely rapid in certain market conditions and our reaction time is then too long to take advantage of the price we would like to have. We see a price displayed (the price we want), but the time to click to place the order, the quotation has changed.-
Slow broker
: Some fraudulent brokers slow down your market orders’ transmission, especially when your orders are in the right direction. Some brokers play against the client systematically (especially market makers), this lets them limit the risk of loss (and your expectation of gain).-
Low-speed internet connection
: If your internet connection is too slow, there can be a delay in updating the platform data.-
Spacing of spreads
: In periods of volatility, brokers increase their spreads to cover themselves, this amplifies the slippage phenomenon if the order is passed during the same period.How to tackle slippage?
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Test your trading platform
: Before you trade live, open a demo account with a broker to see if their trading platform is responsive. Choose the fastest platform to execute your orders.-
Choose a broker with fixed spreads
: Slippage can be amplified by the spacing of spreads in periods of volatility. With a broker with fixed spreads, the spread does not deviate and the risk of slippage is therefore reduced.-
Trading less volatile assets
The higher the volatility, the greater the risk of slippage because the variations are more sudden and rapid.
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Do not trade during economic announcements
Volatility increases during these periods. Distance yourself just before and after these announcements, for the time it takes for a return to normal spreads.
Frequently asked questions about slippage
Can a buy/sell stop order protect me from slippage risk?
Some brokers guarantee the execution price of their clients' stop orders. However, this does not completely protect you from slippage. Effectively, if the price reaches the level of your stop, and during the same time spreads are spread out by your broker, you will then be submitted to slippage for the amount of the additional spread applied by your broker.
Can slippage be in my favour?
Yes, this is called price optimization. This occurs either in a period of high volatility (economic announcements), or in a bullish/bearish gap. Not all brokers do this. Some of them, a little unscrupulously, keep the benefits of price optimization for themselves but happily subject their customers to negative slippage.
