What is Slippage?
From English, slippage directly means price slippage. It is the difference between the expected price and the price of the actual execution of the transaction. This slippage usually occurs when increased volatility is observed in the market, when orders are executed at market prices.
Slippage, moreover, occurs in situations where high-volume orders are executed in a market with limited liquidity.
Are price slips a bad thing?
It cannot be clearly defined as a positive or negative phenomenon. In a situation where an order is executed, it is executed at available prices that are in the order book, or made available by liquidity providers.
As a result, slippage can be perceived both positively and negatively.
As for the so-called “take profit” orders – they can be executed at prices that are more favorable to the trader, resulting in the posting of more profit.
The negative variant, based on the execution of stop orders at a price inferior to the trader, causes a less favorable situation for the trader. This is caused primarily by the fact that buy orders due to slippage are executed at a higher price, while the same situation for a sell order is executed at a much lower price.
Where and when do price slippages occur?
Price slippage occurs most of the time in Forex and is associated with the market maker model. In theory, it can be assumed that the broker – who is incidentally the other party to the transaction – intentionally uses slippage, which allows him to gain a few pips more profit for himself.
For true ECN brokers, the ratio of positive to negative slippage should be at a similar level.
Slippage also occurs in the stock market, where the basis for trading is an order book, where market participants decide to buy or sell a given stock at a price they have defined. Slippage then occurs when a situation arises where there is a lack of liquidity at a certain level defined by the trader.
Recotation versus price slippage – important differences
The deliberate strategies of brokers assuming to obtain benefits are caused, it is worth remembering, by price re-quotes, not price slippage.
Usually the two are confused, resulting in inaccuracies.
This is because re-quoting means “re-checking the price”. If the other party to the transaction is a broker, then re-quoting is an argument to offer a worse price to the trader.
Price slippage also happens with brokers who are the trading side – but it is caused by other factors. It is a situation in which the order we set is between one and another pending order issued by a liquidity provider.
How do you protect yourself from price slippages?
It is worth remembering that there are no 100 percent effective solutions to protect against Slippage.
One of the suggested solutions is to focus on liquid instruments, which include currency pairs from the majors, or the most liquid stocks on the stock exchanges. Liquid stocks include, for example, the Dow Jones, S&P 500 or DAX.
In addition to this, it is recommended to use the so-called stop limit, which allows you to limit the effect of slippage. In this case, it is worth remembering that in the case of stop loss orders, there are no solutions to limit slippage.
As a result, one solution may be to deposit the size of the assumed stop loss in the account with a broker that has a negative balance protection policy. If, therefore, a situation occurs in which a loss is booked that exceeds the assumed initial value then its level will not exceed the original value.
