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💡 IDEAS What is Slippage? Is it Always a Bad Thing?

What is Slippage?

Slippage is when an order is filled at a price that is different than the requested price.

Most conversations I hear regarding slippage tend to speak about it in a negative light, when in reality, this normal market occurrence can be a good thing for traders. As the video above mentions, when orders are sent out to be filled by a liquidity provider or bank, they are filled at the best available price whether the fill price is above or below the price requested.

To put this concept into a numerical example, let’s say we attempt to buy the EURUSD at the current market rate of 1.3650. When the order is filled, there are 3 potential outcomes.

Outcome #1 (No Slippage)

The order is submitted and the best available buy price being offered is 1.3650 (exactly what we requested), the order is then filled at 1.3650.

Outcome #2 (Positive Slippage)

The order is submitted and the best available buy price being offered suddenly changes to 1.3640 (10 pips below our requested price) while our order is executing, the order is then filled at this better price of 1.3640.

Outcome #3 (Negative Slippage)

The order is submitted and the best available buy price being offered suddenly changes to 1.3660 (10 pips above our requested price)while our order is executing, the order is then filled at this price of 1.3660.

Anytime we are filled at a different price, it is called slippage.

What Causes Slippage?

So how does this happen? Why can’t our orders be filled at our requested price? It all goes back to the basics of what a true market consists of, buyers and sellers. For every buyer with a specific price and trade size, there must be an equal amount of sellers at the same price and trade size. If there is ever an imbalance of buyers or sellers, this is what causes prices to move up or down.

So as traders, if we go in and attempt to buy 100k EURUSD at 1.3650, but there are not enough people (or no one at all) willing to sell their Euros for 1.3650 USD, our order will need to look at the next best available price(s) and buy those Euros at a higher price, giving us negative slippage. But of course sometimes the opposite could happen. If there were a flood of people wanting to sell their Euros at the time our order was submitted, we might be able to find a seller willing to sell them at a price lower than what we had initially requested, giving us positive slippage.

Good trading!
 
Slippage used to always bother me, but now I realize that's just the way the market operates. Your order is filled at the next best price if there aren't enough buyers or sellers at your price. It all comes down to supply and demand. That can be worse or better at different times. In fact, I enjoy it when slippage saves me money. However, when it works against you, it can be very annoying. For me, the secret is to recognize that it's typical and use intelligent order types to manage it. You have to accept it as a necessary part of trading!
 

There are three causes of slippage in trading (especially in forex)

  1. Delay when trying to match your order with a counterparty. If you're selling the broker's system tries to match you with a buyer immediately in order to offset their risks, otherwise they will have to take the other side a.k.a make the market so you could buy or sell.
  2. There is a news release and the market moves too fast for the broker's system to fill you in at the price you want. That is usually a sign of a broker with inadequate technology to cope with their ordeflow.
  3. Lastly, the broker introduces delay to cause you to wipe out or cause you losses. This is common practice with a lot of brokers. Since most of them are market makers (forget that thing they tell you about being an ECN provider) they introduce a few milliseconds delay inbetween when you placed the order and when your order gets filled. Their mode of operation allows this to happen since they will sell to you whenever you buy and buy from you whenever you sell.
 

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