What Is Slippage and How to Avoid It

Introduction

Slippage is a common yet often misunderstood aspect of trading. It refers to the difference between the expected price of a trade and the actual price at which it is executed. While often minor, slippage can significantly impact trading performance—especially in fast-moving or low-liquidity markets.

This article explains what slippage is, why it occurs, how it affects your trades, and most importantly, how to reduce its impact through strategic preparation and smart execution.

What Is Slippage?

Slippage occurs when a trade is executed at a different price than expected. It typically happens between the time an order is placed and when it is actually filled. The difference can be positive or negative, depending on market conditions and the direction of the trade.

Key characteristics:

• Positive slippage: Execution at a better price than requested
• Negative slippage: Execution at a worse price than requested (more common)
• Size of slippage: Measured in pips, points, or cents, depending on the asset

Slippage is not an error or malfunction. It is a natural result of price fluctuations in live markets, especially during periods of high volatility or low liquidity.

Why Does Slippage Happen?

Slippage occurs when the price changes between the time an order is submitted and when it is filled. Several market factors can cause or increase slippage:

1. Market Volatility

Rapid price changes—especially during news releases or economic events—can lead to slippage. Prices may jump several ticks in a matter of milliseconds, making it difficult to fill orders at the original price.

2. Low Liquidity

When there are fewer buyers or sellers available at a given price, the order may need to be filled at the next best price in the order book.

3. Order Size

Large orders are more likely to experience slippage, particularly if they exceed the available volume at the desired price level.

4. Order Type

Market orders are most susceptible to slippage since they prioritize speed over price. Limit orders, while offering price control, carry the risk of non-execution.

5. Execution Speed

Delays in order routing, internet connectivity, or platform responsiveness can all contribute to price slippage during execution.

Examples of Slippage in Action

To better understand how slippage plays out, consider the following scenarios:

Example 1: Market Order in a Volatile Market
You place a market order to buy an asset at $100. However, due to a sharp price move, the order is filled at $100.25. The 25-cent difference is negative slippage.

Example 2: Large Order in Low Liquidity
You try to sell 1,000 shares at $50, but the order book only has 600 shares available at that price. The remaining 400 shares are filled at lower prices, resulting in an average execution price of $49.80—creating a slippage cost.

Example 3: Positive Slippage
You place a sell order at $150, but the market gaps higher and executes the order at $150.10. You benefit from better-than-expected pricing.

While positive slippage does occur, it's less frequent and generally less impactful than negative slippage.

How Slippage Affects Your Trading

Over time, slippage can erode profits or increase losses—especially for short-term traders, scalpers, or those trading during volatile sessions.

Key impacts:

• Increased trading costs: Slippage acts like an additional fee per trade.
• Distorted risk-reward ratios: Entry or exit prices can differ from the planned levels.
• Execution uncertainty: Makes it harder to rely on technical setups or precise strategies.
• Compounding effect: Frequent slippage across many trades adds up over time.

For traders relying on tight stops or narrow profit margins, even small instances of slippage can disrupt strategy performance.

How to Reduce and Manage Slippage

Although slippage cannot be completely avoided, several techniques can help minimize its impact:

1. Use Limit Orders When Precision Matters

Limit orders only execute at the specified price or better. While they don’t guarantee execution, they eliminate negative slippage risk.

2. Avoid Trading During Major News Events

Slippage spikes during high-impact announcements (e.g., central bank decisions, economic reports). Unless you're trading the news deliberately, it’s best to avoid entering positions during these windows.

3. Trade During High-Liquidity Periods

The most liquid periods (such as the overlap of major market sessions) provide better order book depth and tighter spreads, reducing slippage risk.

4. Reduce Order Size Relative to Market Depth

Ensure your trade size aligns with the available volume in the market. Breaking large orders into smaller blocks can help reduce impact.

5. Use Stop-Limit Orders for Risk Control

Unlike traditional stop-loss orders that convert to market orders, stop-limit orders add a price cap—protecting against excessive slippage when exiting trades.

6. Choose Markets with Consistent Liquidity

Some instruments are more prone to slippage due to thin trading volume. Focus on assets with stable liquidity if minimizing slippage is a priority.

By combining these practices, traders can reduce their exposure to the hidden costs of slippage and improve the consistency of their strategies.

The Trade-Off Between Execution and Control

Every order type involves a compromise between execution certainty and price control:

• Market orders prioritize speed and guarantee execution, but risk slippage.
• Limit orders offer price protection, but may not fill if the market moves away.
• Stop orders provide automatic risk management but can trigger at unfavorable prices.

Traders must decide which factor—speed or price—is more important for each trade. This choice often depends on market conditions, trade size, and strategy goals.

Conclusion

Slippage is an unavoidable aspect of real-world trading. While it often goes unnoticed in stable markets, it can have a significant impact during periods of volatility or low liquidity. By understanding why slippage occurs and adopting practical techniques to manage it, traders can reduce unnecessary costs and maintain greater control over their executions.

Curious about market vs limit orders and when to use them? Learn more here.