This video explains how slippage may result in positions closing at prices which are different from those requested, either in real-time trading or when using risk management tools.
Slippage mainly occurs during periods of high market volatility, such as following major market news, but it can also occur outside peak trading times. It can affect any financial instruments available for trading, such as forex pairs, indices, stocks, commodities and more. Slippage can be either positive or negative, which means that sometimes it results in a higher closing price, and sometimes in a lower closing price than requested.
What is slippage and how does it work?
The difference between your requested order price and the order’s execution price is referred to as Slippage. When prices move quickly, your order can be executed at a different price than was quoted when the order was placed. Slippage happens as a result of the fast pace of the financial markets. While it can occur at any time, slippage is most common during periods when prices are frequently changing, such as after a share earnings report or when there are short-term fluctuations of supply and demand for a specific commodity.
Slippage can also happen when using management tools, such as “Close at Profit”, “Close at Loss” or “Trailing Stop” to select future closing rates. When prices are changing quickly, the requested closing rate may not be available in the market. Therefore, your position will be automatically closed at the next available price.
Can slippage be avoided?
Slippage is a known phenomenon in financial markets, and it is not introduced deliberately by the broker; therefore, it cannot always be avoided. However, there are some actions that a Plus500 trader can take to reduce the effects of slippage when closing a position.
For some instruments, Plus500 offers a Guaranteed Stop, which you can activate in advance. This risk management tool will close your positions at the price you’ve specified, even if that rate is not available when your position closes. The use of this tool is provided as a service and subject to a wider spread. You can find more information about all of our risk management tools here.
Why can slippage be positive or negative?
Slippage can work for you or against you. Sometimes a Buy trade might close at a price that is higher than expected, or a Sell trade might close at a price that is lower than expected. In these cases, positive slippage is recorded, resulting in a greater potential profit than if the position had been executed at your requested price.
At other times, a Buy trade might close at a price that is lower than expected, or a Sell trade might close at a price that is higher than expected. This would lead to negative slippage, and a lower potential profit or greater loss than if the position had been closed at the requested price.
Let’s look at some examples:
Example 1 - Positive slippage
You want to close an open Buy position at $25.29, but the market suddenly goes up to $25.30 (above your quoted price). Your position would close at the next available price, and you would then receive a $0.01 positive slippage.
Example 2 - Negative slippage
You want to close a Buy position at $183.53, but the market suddenly moves down to $183.50 (below your quoted price). Your position would close at the next available price, and you would experience $0.03 of negative slippage.
Example 3 - Future order
You set a Stop limit to a Buy position to close at $17.45. The current price is $17.46. Suddenly, the market gaps down to $17.44 (below your requested price). Your position is subsequently closed at $17.44, which is the next available price. You end up with negative slippage of $0.01.
How can traders minimise the effects of slippage?
The best way to minimise its effects is to watch the market events as they develop and to track any signs of higher than average volatility as well as unusual volume on any assets you plan to trade.
By checking economic news frequently, and charting the past performance of instruments, you can get an idea of when markets are volatile, and when slippage is likely to occur. You can do this from the Plus500 trading platform when you sign up / log in. It is also a good idea to keep an eye on your open positions so that you can manage these trades promptly.
Whenever high market volatility is a factor, trading presents a more significant opportunity for both risk and reward. This means that you can make a potentially higher profit or loss on trades than usual compared to the margin required to open a position.