Why does slippage in trading occur

Slippage is a common part of online trading. While a negative slippage grinds the gears of many traders, its positive version is a welcome phenomenon, which, unfortunately, a large number of traders will find out because brokers usually act as if positive slippage never existed. But why do slippages occur and can they be predicted and taken into account in your trading? This article discusses just that.

A brief definition of slippage

First, let's briefly recall how a slip can be defined. Slippage is defined as the difference between the price at which you want to execute your trade and the price at which it is actually executed by a broker or liquidity provider. There is always a certain, albeit very short, time between each of your clicks to open/close a position (or to stop-loss, take-profit, and other pending orders). The length of this time then often determines the size and nature of the slip (whether it’s positive or negative).

Why Slippage occurs

  1. Low liquidity

    If you are one of those traders whose strategy is based trading of exotics, ie currency couples that are not being traded often, you should expect slippage to occur. That’s because in exotic currencies markets there’s a lower liquidity, and what we know for a fact is that when there is a lower liquidity it can take an extended period of time for a counterparty to match your order. Although when we mention “longer period of time” we still mean fractions of a second. Nevertheless, even that’s enough time for market price to change.

    The most popular exotic currencies include:

    HKD – Hong Kong Dollar
    MXN – Mexican Peso
    CNY – Chinese Yuan
    SGD – Singapore Dollar
    KRW – South Korean Won
    ZAR – South African Rand
    RUB – Russian Federation Ruble
    INR – Indian Rupee

  2. High volatility

    Important macroeconomic events, press conferences with a significant economic impact, or the even slightly heated tweet exchange between representatives of hostile states can all lead to high market volatility. The situation where the price level "shoots" up and down is then an ideal environment for slips to occur. So if you are one of the traders who are looking for volatile markets, we recommend you to be wary of slips. Or at least pay attention to them.

  3. Big volume trading

    Slippages also tend to occur in cases where traders operate with large trading positions. Each market has a certain depth of liquidity. This can be imagined as a kind of ladder with rungs on which pending orders from individual institutions and liquidity providers are placed.

    At the top rung is the best price available for which institutions are willing to trade at the moment, the so-called "top of the book". This price actually corresponds with the price that you see in the platform and it’s probably also the price you demanded. Orders with a price, further away from your ideal, are then placed on the lower rungs.

    Each of these rungs is able to fill only a certain, predetermined, volume (often only in the order of a few lots). So if you intend to trade a higher volume position (tens of lots), you must take into account that it could be divided on the interbank market and traded at prices distributed over several rungs. The final price will thus correspond to the weighted average from across multiple rungs, and thus there will be a slip from the originally demanded price.

    To make matters more difficult, it can happen, for example, that due to a large trading position, your order will "eat up" the depth of the market and a negative slippage will appear. However, due to the rapid change of price in your favor, the resulting slip you will see on the platform will be positive.

How to tell if your broker is being honest

As we mentioned in the introduction, both negative and positive slippage is a natural part of trading. It is therefore necessary to take them into account. Ideally, the slips should be evenly spaced. This should result in approximately the same number of negative and positive slips. However, what you should pay attention to is the way your broker handles the slips.

The privilege of a quality broker is, in addition to the even distribution of positive and negative slips, also to admit positive slips to his clients in the event that they occur.

A "healthy" slippage distribution can be identified with the help of graphs of their distribution. A fair broker should have no problem showing you these charts on request. At Purple Trading, we list them directly on our website. Take a look at the Purple Trading slide distribution chart.

In conclusion

We hope this article has helped you to understand the issue of slippage in trading a little better. We believe that you will find the information obtained useful in developing your own unique trading strategy. If you are interested in a regular supply of good quality information and at the same time would like to trade with a broker who handles slippage distribution fairly, do not hesitate to try Purple Trading.

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Broker’s ability to fill client’s order in the market at the desired value and in the desired volume.
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A slippage in order filling. It expresses the difference between the asked price at trader’s side and the price at which the order is executed in the market (in market execution, it is the best available price in the market at that time). Slippage can have positive as well as negative value.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76.60 % of retail investors lose their capital when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.