Slippage is when an order is opened at a different price than the requested price, i.e. the order experienced slippage because the bid/ask price changed between the time the order was requested and when the order was executed on the exchange.
Example: A trader attempts an order to buy EURUSD at 1.35601, but due to market volatility or a bad internet connection, the order is executed at 1.35700.
Slippage = (Executed Price - Requested Price)/Pip Size = (1.35700 - 1.35601)/0.0001 = 9.9 pips
When does slippage happen?
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Slippage is 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.
Is slippage a bad thing?
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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.
- Positive slippage is when the ask is lower when buying or the bid is higher when selling.
- Negative slippage is when the ask is higher when buying or the bid is lower when selling.
Limit orders are preferable to stop orders, because limit orders may result in positive slippage as orders can be executed at the requested price or a better price, while stop orders may result in negative slippage, as orders can be executed at the requested price or a worse price.
Managing slippage
An effective way to manage slippage is by using limit orders; additionally, it is recommended to avoid trading during volatile periods.
Limit orders cannot result in negative slippage, and stop orders cannot result in positive slippage.
Let's assume an order has been opened with the following parameters:
- Buy 1 lot EURUSD at 1.35601
- Stop loss (SL): 1.35580
- Take profit (TP): 1.35700
- Price before gap: (1.35680)
- Price after gap: (1.35890)
- Slippage-free range: 0-8 pips
The order was opened at 1.35601 with the plan to close at 1.35700 (TP) if the price increased. However, the price jumped from 1.35680 to 1.35890 due to a gap in the market.
As per our slippage rule, the difference between the requested price (1.35700) and the price after the gap (1.35890) is calculated and checked against the slippage-free range to determine the order execution price.
Difference = (1.35700 - 1.35890)/0.0001 = 19 pips.
Since this is above the slippage-free range, the order is executed at 1.35890 which brings more profit compared to the set TP (1.35700).
Let's assume an order has been opened with the following parameters:
- Buy 1 lot EURUSD at 1.35601
- Stop loss (SL): 1.35580
- Take profit (TP): 1.35700
- Price before gap: (1.35590)
- Price after gap: (1.35480)
- Slippage-free range: 0-8 pips
The order was opened at 1.35601 with the plan to close at 1.35580 (SL) if the price decreased. However, the price jumped from 1.35590 to 1.35480 due to a gap in the market.
As per our slippage rule, the difference between the requested price (1.35580) and the price after the gap (1.35480) is calculated and checked against the slippage-free range to determine the order execution price.
Difference = (1.35580 - 1.35480)/0.0001 = 10 pips.
Since this is above the slippage-free range, the order is executed at 1.35480 which brings more loss compared to the set SL (1.35580).