Prices will move up and down, and sometimes they can change in a matter of milliseconds. If this happens between the moment you submit an order and the point when it’s executed, you might not get the exact price you originally intended to deal at.
Slippage is when the price you intended to deal at 'slips' due to a fast-moving market
When your order is filled at a different level from the one you specified, this is known as slippage.
Slippage usually occurs when the underlying market experiences high volatility, which causes the price to move very rapidly past your requested order level. When this happens, your order will be filled at the first level that is reasonably possible, which may be less advantageous to you.
How slippage happens
Say you open a long position based on the Dow Jones Industrial Average index at 17,838 with a stop at 17,700.
After the US economy hits a bit of a rough patch, the share prices of constituent Dow companies begin to drop, and the index price subsequently tumbles through your stop.
Here’s a table showing how the price quoted by a provider might move in the moments before and after your stop is hit:
Your stop order is triggered as soon as the price goes through your stop level of 17,700, at 21:10:32 (shown in blue). You can see that the stop order is carried out in milliseconds, completing at 21:10:33 (shown in red), but it is at a price of 17,699 meaning you have paid one point in slippage. You are, however, protected from the rest of the price drop.
How to avoid slippage
In the example above, slippage could have been avoided by using a guaranteed stop. This type of stop order will always close your position at exactly the level you specify, although your provider will normally make a charge for giving you this extra level of protection. When this charge occurs can vary – some providers will charge when you attach the stop, some only if your stop is actually triggered.
Spread betting providers may also offer other safeguards against the risk of slippage. For example, they may ask you to resubmit your order rather than filling it at a price you don’t want, in certain circumstances. Or they may offer to absorb small amounts of slippage in the interests of good relations with clients. These will depend on your provider.
How slippage can benefit you
It’s worth noting that slippage can sometimes actually result in orders being filled at more advantageous levels than originally specified.
If you’re using a limit order and the market moves quickly in your favour, your provider may have the facility to give you a better price, depending on their individual policy.
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