25.What is slippage?
The difference between the expected price and the executed price
Slippage refers to the situation in the trade where the difference occurs between the expected price and the actual executed price, no matter it is a market order, a take-profit order, a stop loss order or any entry order. When a pending order in the trading platform is triggered and then the order is sent into the market, it will automatically look for the best price according to the trading logic in the market. But at that moment, once the market price changes, even slightly, the actual executed price of that order may differ from the intended price. This difference in execution is called “slippage".
Theoretically, slippage can occur at any time or in different markets. It is a market risk that cannot be avoided and cannot be completely controlled by trading platforms/brokers. The occurrence of slippage is affected by several factors, including price delay or network delay, market volatilities (such as gapping), trading order size, market liquidity and the interrelated issues of the above. In short, a slippage occurs when an order placed cannot find the perfect match in the market.
In forex market, slippage is often talked about because it may cause loss to traders. But the truth is that there is no slippage problem in most market conditions.
Is slippage always bad for a trader?
Traders generally feel uneasy about slippage. However, a slippage does not necessarily mean "the price moves against the trader".
Any difference between the expected price and the actual executed price is regarded as a slippage. Under normal circumstances, the order is executed in the logic of the best possible trading price, so that the final executed price maybe even better than expected. This is called “positive slippage”, otherwise, it is called “negative slippage”.
If the trader wants to reduce the occurrence of slippage, he should pay more attention to the following situations when trading:
- Avoid trading during volatile periods (usually comes with a sudden drop in market liquidity), such as the release of important economic data.
- Lower the trading volume of the orders when the market is thin (low liquidity), such as holidays or non-peak trading hours (after closing of the US trading session and the early Asian session), as any big orders can have a significant effect on the market price, causing the possibility of the negative slippage.
- Set the order condition. Some platform systems can set the maximum tolerance distance of the execution price, thereby reducing slippage or limit the range of slippage.
Next Article: 26. What is long and short position?
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Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted in accordance with this article. Please be firm in your thinking and do the corresponding risk control.