Watch this video to learn about slippage, a known phenomenon that may challenge the execution of a trade at the expected price.
Slippage usually occurs during periods of high volatility and after major market news - and can be relevant for all financial instruments: stocks, forex pairs, commodities, indices and more. It can work both in your favour and against you.
What is slippage and why does it happen?
When trading online, there is a possibility that your trade will be executed at a price that is different from the price you requested. This is a common phenomenon in the world of trading, and is known as ‘Slippage’. Slippage mainly occurs due to the volatile nature of financial markets that are traded in real-time conditions (i.e., short-term fluctuations in supply and demand, as well as changes in the prices of tradable assets such as shares, commodities and forex pairs).
Slippage can also happen when placing a future order (or pending order) to Buy or Sell at a future rate. In this case, the reason for slippage is that your requested rate is not available in the market, so the future order will only open at the next available rate.
On occasion, an instrument's trading volume may drop to a level that is lower than usual or jump to a level that is higher than usual (for instance, when trading resumes after a weekend, or following a major news event). Trying to open a position during these extreme movements is likely to result in slippage.
Can you avoid slippage?
It is important to clarify that slippage is not implemented intentionally by the broker, and it cannot be avoided. Slippage is forced upon the broker by the exchange/market of the underlying instrument. Plus500 executes trades based on real market conditions and therefore cannot ensure positions will open at your requested price.
However, for some instruments, Plus500 offers a Guaranteed Stop, which is a risk management tool provided as a service and charged by a wider spread. To learn more about all of our risk management tools, click here.
Slippage is not necessarily a bad thing
Slippage can sometimes act in your favour. For example, when a Sell trade opens at a price that is higher, or a Buy trade opens at a price that is lower than what you have requested. Your potential profit would be higher as a result of either scenario.
Examples of slippage
Example 1 - Positive outcome
You want to open a Buy position on EUR/USD at 1.345 but the market suddenly gaps down to 1.342 (below your requested price). This is the closest available price.
Example 2 - Negative outcome
You want to open a Buy position on EUR/USD at 1.345 but the market suddenly gaps up to 1.347 (above your requested price). This is the next available price.
Example 3 - Future order
You want to open a future Sell order on EUR/USD at the price of 1.345. The current price is 1.341. Suddenly, the market gaps up to 1.347 (above your requested price), and your trade is opened at 1.347 - the next available price.
Is it possible to minimise the effects of slippage?
Slippage cannot be avoided but its chances of occurring can be minimised if you keep track of developments in financial markets, and especially look out for signs of increased volatility and/or changes in an asset’s trading volume.
You can do this by following economic news on a regular basis, and by looking at the past performance of an instrument (for example, you can simply sign up / log in and go to the chart and check for patterns in different time-periods).
You should bear in mind that when trading in volatile market conditions, your risk-reward ratio is higher than usual, which means you could potentially profit or lose more compared to the amount of money needed to open the position.