Slippage Definition: Day Trading Terminology
Slippage is the difference between the executed and expected price of a trade. It generally occurs during a period of high volatility, as a result of using a market order or when a large order fails to find adequate counter-party interest at the expected trade price.
Both a negative and a positive divergence from the expected price will qualify as slippage, depending on the nature of the executed order. When an order is executed, the corresponding securities are sold or purchased at the most favorable price that is available at the time.
Therefore, it can cause results that are more, equal or less favorable than the original expected outcome, and the results are accordingly referred to as negative slippage, no slippage and positive slippage.
Since market prices are prone to swift changes, slippage will occur during the delay between a trade’s execution and completion. Slippage as a term is used in both stocks and foreign exchange trading, and while the general concept is the same in both cases, slippage will occur in different situations for the two different trading types.
Slippage In Equity Trading
This happens in equity trading usually occurs when the spread changes. A market order that is placed by a trader gets executed at a price that is less favorable than was originally expected. In the case of long trades, the asking price will have increased. In the case of short trades, the bidding price will have lowered. Equity traders can increase their protection from slippage by avoiding market orders whenever possible.
Slippage In Foreign Exchange Trading
In foreign exchange trading, slippage occurs when orders are executed, usually without the use of limit orders, or when stop losses occur at a rate that is less favorable than the one originally set in the order.
It is likely to happen when trading volatility is high, which results in orders being impossible to execute at desired prices. In these situations, most foreign exchange dealers will execute the order at the next best price, unless a limit order stops the trade at a preset point.
While limit orders will prevent negative slippage, they carry the resulting risk of a trade not being fully executed at all when the price fails to return to the approved price range.
This risk will increase in a situation where market fluctuations happen more swiftly, which will significantly limit the time that is available for a trade to be completed at an approved price.