What is slippage?

January 16, 2014

What are some examples of slippage?

When you’re trading, sometimes you’ll notice a slight difference between the price you expect and the execution price (the price when the trade is completed). When this happens, it’s known as slippage. It’s a common thing to experience as a trader and it can work either positively or negatively.

The main reasons for slippage are market volatility and execution speeds.

When a market experiences high volatility it generally means there’s low liquidity and market prices fluctuate very quickly. Where this affects you is when there’s not enough liquidity to fill an order at the requested price. When this happens, the liquidity provider will complete the trade at the next best price.

Another cause for slippage is Execution Speed. This is how fast your Electronic Communication Network (ECN) can complete your trade at the price you want it to. With market prices changing in fractions of a second, having faster execution times can make a difference, especially on large trades.

Example:

The price of the AUD/USD was 0.9010. After analysing the market, you speculate that it’s on an upward trend and long a one standard lot trade at the now current price of AUD/USD 0.9050, expecting to execute at the same price of 0.9050.

The market follows the trend but goes past your execution price and up to 0.9060 very quickly – within a second. Because your expected price of 0.9050 is not available in the market, you’re offered the next best available price. For the sake of the example, that price is 0.9045.

In this case, you would experience positive slippage:
0.9050 – 0.9045 = 0.0005, or +5 pips.

On the other hand, let’s say your trade was executed at 0.9055. You would then experience negative slippage:
0.9050 – 0.9055 = 00.0005, or -5 pips.

It’s important to note that slippage can occur with all types of requested orders including Stop Loss, Take Profit, Buy/Sell Stops and Buy/Sell Limit Orders. As MXT is not a market maker, we cannot guarantee such orders. We operate under Market Execution and for this reason, we are unable to fill an order that no longer exists. If your requested price is no longer available, your order will be filled by our liquidity providers at the going market rate.

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