4 min reading
When is slippage said to occur, what could possibly lead to this, and how can it be avoided? All these questions are answered in this article.
One of the most unexpected risks for novice crypto investors is slippage. Unfortunately, this phenomenon inevitably haunts traders and disrupts plans. What slippage is, how it happens, and what causes it, you will learn in this article.
What is slippage
Slippage at the market is a situation when a stop-order is executed at a worse price than that specified in the conditions of such an order. In other words, the order is executed at a less favourable price than the trader had planned. Moreover, slippage is inevitable in any volatile market and especially during periods of sharp price fluctuations (for example, at the release moment of long-awaited important news), when there are many participants making transactions and the risk of not getting the asset at the desired price increases significantly.
Types of slippage
In general, slippage is divided into two types: positive and negative. If positive, the trader suddenly earns a higher profit than he or she hoped for, while in the second case, on the contrary, he or she suffers a higher loss. In both cases, slippage is caused by volatility and large market movements, as well as delayed execution of trader’s decisions. In the first case, the pendulum may swing in his favour, and in the second case, it will swing back.
Causes of slippage
It goes without saying, the most important cause of slippage is high volatility and a short-term lack of liquidity in the chosen instrument, but why? Several factors influence the sudden spike in volumes and price movements. For example, a news release. The most trivial cause of slippage occurs all the time. The reason may come from testing of important price extremums. Often a spike in volatility can occur when annual highs or lows approach, matching a news release. Anyway, it can also occur for no apparent reason. The market is unpredictable and can go off a cliff at any time, with no apparent reason even in the future. Maybe a big player urgently needed to sell some assets for his own purposes, but we can only speculate about that. In addition, one more factor is price gaps. They could be technical, when the market opens after the weekend, and for some other reasons. There is no public information about this anywhere, so it is impossible to predict gaps reliably.
What are the dangers of slippage?
Let’s assume that each trade order and its Stop Loss – slips by one pip. For medium-term trades and long-term trading strategies, it is of course not critical, but for scalpers and even scalping strategies, it can be catastrophic. Taking into account the cost of the spread, a loss of tens or even hundreds of pips per day can completely wipe out the profits of short-term trades. If the reported price is in a zone of strong levels, then strong slippage can incorrectly set your Stop Loss and at the first pullback, your trade will be closed with a loss. During periods of high volatility, the number of participants increases dramatically, and more often than not, in the same direction, so the risk of slippage increases significantly.
How to avoid slippage
Considering the factors described above we can determine the way to avoid the negative result of slippage. The first thing you can do, if you can, is to switch to medium and long-term trading and not to bother with slippage and spread as well. For a scalper, you should study more attentively the broker’s trading conditions. Examine all reviews, some brokers don’t like scalpers and in the conditions of trade, they prescribe the clauses, excluding taking profit from short deals. Choose the optimal Internet provider with the high speed of the Internet. Choose optimal trading periods, refrain from trading during important news releases, when the volatility is too high. Use pending orders. When opening a pending order, the trader sends a request to open a position in advance, and when the price of the pending order reaches the server, the request is already on the server. Thus the speed of the Internet and the remoteness of the terminal from the server does not affect the execution time of the pending order. Finally, when opening an order, specify the maximum allowable slippage.
However, slippage in trading is an objective phenomenon, it is just considered a “healthy” sign of real exchange trading. The suggested methods will help protect your deposit from slippage as much as possible unless they contradict your trading strategy. Otherwise, adjust your trading methodology to the real market.