What is slippage?
Slippage is when your order is filled at a different price than requested. If the instrument we are trading is not very liquid, there will be significant slippage, although we will get some slippage in almost any instrument. That is very important, above all for stop loss orders.
I remember many years ago, when I was trading gold futures, and I had a long position overnight. My stop loss was about 8 $ (800 $) below the day close. Next day, I was very surprised when I saw that I had a 13 points (1300 $) loss. I called my broker immediately, and they told me that there was a gap due to huge selling in the London opening session, and my order had been slipped because there was no liquidity at that time. I was a novice trader and had no idea about slippage. That day I learned what slippage was.
There are a lot of people who do day trading on paper. The majority of those studies do not count on the slippage, and that is quite a mistake, because that cost is one of the biggest we may find in the world of trading. A cost that might make a good system turn into a bad one.
Slippage is very common in illiquid instruments, like penny stocks or exotic currency pairs, where you can get slippages so big that you may think of giving up trading for a while. I remember seeing people talking about their awful experiences with this: a 35 pips slippage on GBPJPY; 20 here; 15 there.
There will always be slippage. Recently I had a seven pips slippage with one broker and 13 pips with another broker for the same order. If that occasionally happens, there is no problem; it is part of the game. But if we see that it happens quite often with the same broker, then we should consider switch broker.
Ideally you will have two brokers so you can compare.
This issue is very common in forex markets.
Forex brokers slipagge
There was a time, when many forex brokers used this technique to make extra profits. They would charge you negative slippage but not a positive one. This situation has improved and nowadays it is rarely seen.
Brokers have enough people doing day trading and losing continuously that they should not try this sort of things.
If we want to avoid this we should trade liquid pairs, and try not to trade when the major news are announced; like NFP or central banks interest rates decisions.
When you place a market order there is no way you can “see” slippage. The market will take the available price for your order, whether you like it or not. Markets move fast, you know. And when you trade you will usually get filled at a worse price than expected, even when you do it with a market order.
Slippage limit order
There is one way to avoid slippage almost completely, and that is using a guaranteed limit order. But there is one problem here, because that order can be filled or not be filled at all.
If we have a very volatile market, the price is 5 pips below your guaranteed limit order, and someone very big, like a big fund, trades 10 thousand contracts, it is very likely that you limit order will be gapped and you will not be able to open that trade if the price does not come back. There are people who recommend this to avoid slippage, but I do not know if it is a good idea, because from time to time you will lose a winning trade just because your “guaranteed” order was not filled and you were out of the trade. Everyone does what they like.
Another thing to consider is the size of the trade. It is not the same when we trade one contract than when we trade 2000.
If we buy one ES future, we should expect that our order is filled at the market price without slippage. But if we order 5000 thousand contracts we should expect our order to be filled at different prices: 300 at 2000, 400 at 2000.25, 450 at 2000.50, etcetera.
Slippage is an unavoidable cost in trading. It does not matter if it is CFDs, Forex, stocks or futures.
The only way to “avoid” the problem of the slippage is to trade very long term, where a couple of pips do not make a difference.
P.S. This is a personal translation from my spanish blog www.brokerparacompraracciones.com.
Thanks for reading and sharing.