Slippage is a term that describes when an order is opened at a different price to the requested price, i.e the order experienced slippage because the bid/ask price changed between the time the market order was requested and when the order was executed on the exchange.
Slippage is the difference between the expected price of an order and the price at which the order is executed.
When does slippage happen?
It is most common when the market is volatile, as prices change rapidly from moment to moment. Slippage can happen for many reasons, including poor latency on trading servers and high importance market events. Slippage is possible when executing market and pending orders on all account types.
Example
A trader attempts an order to buy EURUSD with the price of 1.35601 but, due to market volatility or a bad internet connection, the order is executed at a different price from the one requested.
If the price opened at 1.35700, for example, then the order has been executed with a slippage of 9.9 pips: (Executed Price - Requested Price)/Pip Size = (1.35700 - 1.35601)/0.0001 = 9.9 Pips
Is slippage a bad thing?
It is best to avoid slippage for a more stable trading experience, but it is not necessarily a negative event as the price difference can be both favorable or unfavorable for the trader. One can categorize the executed price of an order as positive slippage, negative slippage, or no slippage.
- Positive slippage: the ask is lower when buying or the bid is higher when selling.
- Negative slippage: the ask is higher when buying or the bid is lower when selling.
Managing slippage
The best way to manage slippage is with limit orders, to mitigate market volatility.
Limit orders are preferable to stop orders, because limit orders will always result in positive slippage while stop orders will always result in negative slippage.
Below are examples of how limit orders and stop orders work with slippage.
Slippage and Limit Pending Orders
Let's assume an order has been opened as following:
1 lot EURUSD
Stop Loss (SL): 1.35580
Take Profit (TP): 1.35700
Price before gap: (1.35680)
Price after gap: (1.35890)
The order was bought at 1.35601 with the plan to sell at 1.35700 if the price increased, as set by the TP. However the price jumped from 1.35680 to 1.35890 due to a gap in the market. The trader had their TP (1.35700) set within the gap, so the order was executed at 1.35890 rather than the set TP, due to how price gap protection works.
According to the Price Gap Protection, if the difference in pips between the first market price (after the gap) and the requested price of your order is equal to or exceeds a certain number of pips (Gap Level value) for a particular instrument; your order will be executed at the first market price after the gap. If the difference is less than the Gap Level value, your order will be executed at your requested price.
The difference between the set TP and executed price in pips is calculated:
(1.35700 - 1.35890)/0.0001 = 19 pips.
In this case, EURUSD has a Gap Level value of 8. The difference in pips between the set Take Profit price and the first market price after the gap is 19, which exceeds 8, so this order was executed with a positive slippage of 19 pips at the first market price (after the gap). This will bring more profit than the trader planned for when they set the TP.
Slippage and Stop Pending Orders
Let's assume an order has been opened as following:
1 lot EURUSD
BUY 1.35601
Stop Loss (SL): 1.35580
Take Profit (TP): 1.35700
Price before gap: (1.35590)
Price after gap: (1.35480)
The order was bought at 1.35601, with the plan to sell at 1.35580 if the price decreased, as set by the SL. However the price dropped from 1.35590 to 1.35480 due to a gap in the market. The trader had their SL (1.35580) set within the gap, so the order was executed at 1.35480 rather than the set SL, due to gap level regulation.
The difference between the set TP and executed price in pips is calculated:
(1.35580 - 1.35480)/0.0001 = 10 pips
EURUSD has a Gap Level value of 8. The difference in pips between the set Stop Loss price and the first market price after the gap is 10, which exceeds 8, so this order was executed at the first market price (after the gap). This negative slippage of 10 pips will result in more loss than the trader planned for when they set the SL.
Limit orders often result in greater profit while stop orders often result in more loss when slippage happens. Follow the link for more information on how to set up stop loss and take profit.