Everyone who has been trading at least for a while has faced slippage. This doesn’t matter which financial market one prefers because this happens to everyone. This term is used to describe the situation when the cost of a trade doesn’t meet the expectations of a trader.
How slippage depends on the types of orders
Let’s imagine, you decided to buy an asset valued at $125.97. When your order is being executed, the stock price grows and as a result, you pay $126.02, instead of the expected value. This happens when you rely on market orders. If you want to avoid such unnecessary additional expenses, it’s better to switch to limit orders.
Limit orders are good tools to prevent slippages because they won’t be executed if the price isn’t beneficial for a trader. Limit orders are executed only when a position satisfies expectations or comes at a beneficial price for you – lower when buying and higher when selling. Although limit orders help to avoid slippage, we cannot deny the fact that they also have some disadvantages. One of them is that it will work when the price gets to the set limits and if there is a supply of the asset available to purchase at that time.
How to enter positions and eliminate the probability of slippage
When entering a position, it’s recommended to use limit and stop-limit orders. With such orders, your trade won’t be simply agreed upon and processed if the asset price doesn’t reach the pre-determined limits. This is a risk-free way to trade, although such a strategy might also prevent you from entering quite lucrative positions.
Market orders offer higher risks. They guarantee that the orders will be executed but no one can guarantee that you won’t face slippage and enter the position at the expected price.
Different types of orders are suitable for different trading strategies. For example, if there are fast-moving market conditions, some strategies recommend using market orders to enter or exit positions. This adds volatility and increases your chance to face slippage on the way, although you might benefit if the price changes for the better.
How to exit positions without financial losses
You should understand that when exiting positions, you cannot have the same control over your funds because they are already on the line. Market orders are much more efficient if there’s a need to quickly exit a position. If conditions are beneficial for you, limit orders will be also good.
Some brokers and trading platforms allow their clients to set special stop-loss features that help to prevent losses by exiting a potentially unfavorable trade. If you have such a feature set, it’s recommended to use market orders. You might not enter at the beneficial price but you will not lose your money on slippage, as well.
When should I expect the biggest slippage to happen?
If you aim to avoid the biggest slippage, we recommend following the major news events and not trading when they take place. Such announcements might cause very fast asset price changes and if you use market orders during day trading, this might lead to big slippage. Some traders are willing to take this risk because they expect the quotes to move favorably. However, often this risk isn’t worth the potential profit.
That is the reason why you should always be following your economic calendar and the announcement of the major economic event. In order to minimize the risks, before entering positions, check the calendar and don’t trade several minutes before or after important economic announcements. Take some time and wait until the situation becomes calmer.
How do I manage risks during important announcements?
During day trading, make sure to exit your positions before the announcements that might have a big impact. This way you will avoid or reduce slippage and enter that position again, after the announcement, under more favorable conditions. Surprise announcements often end up with a big slippage so we don’t recommend you to take this risk.
If you avoid trading during big events, you increase your chance to avoid slippage. In such a case, the efficiency of your trading process might be increased by the stop-loss feature set.
Keep in mind that it’s impossible to avoid all the risks when trading. You can only make sure to face as few risks as possible.
Where slippage is the most common
Slippage happens in all financial markets. You can even learn what is slippage in crypto if you like trading digital currencies. But usually, slippage occurs in thinly traded markets. To reduce your chance to face it, you can trade assets with ample volume. Or, if you trade forex, you can avoid slippage by trading when London or the U.S. are open.
Final word
In this guide, we listed a lot of recommendations on which instruments and strategies can be used to minimize or completely avoid unnecessary expenditures associated with slippage. Let’s conclude our ideas:
- limit orders should be used when exiting favorable trades;
- to exit a position quickly, use market orders;
- if your trading platform provides a stop-loss feature, activate it and use market orders;
- don’t trade during important events and before/after economic announcements that might have a big impact on financial markets.
That’s it for now. We hope that these simple recommendations will make your life easier and your trading more profitable!