What is slippage in trading and how can you avoid it?

What is price slippage?

Price slippage is the term that describes instances when traders have to settle for a different price than what they initially requested due to the underlying market changing in value quickly.

It’s important to understand slippage because it can impact your trading costs, alongside other fees.

Slippage occurs when there is either low liquidity in a market – meaning there are fewer participants to take another side of a trade causing delays – or high volatility, causing prices to change rapidly.

Typically, when you place a buy or sell order with your broker, you expect it to be filled at your chosen price. But when a market is experiencing slippage, the bid/ask spread changes between the time your broker submits the order and when an exchange or market maker executes it, resulting in a different price.

Slippage tends to occur more frequently around large market-moving events – such as central bank announcements – or when earnings are released outside of trading hours, which can cause the market to change price overnight and potentially gap upon opening.

Slippage in forex

Although slippage can occur in all financial markets, it’s more common in forex as currency prices are prone to higher levels of volatility. However, slippage is less common in major currency pairs, such as EUR/GBP, GBP/USD and USD/JPY, given that they have extremely high liquidity.

How does slippage work?

Slippage can either work for or against your position because there are two types: negative and positive slippage.

Negative slippage is the name for when the price difference gives you a worse rate than intended. For example, if the price is higher than the expected price for a long position, or lower than the expected price for a short position.

Positive slippage is the name for an advantageous price difference. For example, if the price is lower than expected for a long position, or higher than expected for a short position.

How to avoid slippage in trading

Slippage is a normal part of trading, so it’s not completely avoidable. But there are a few ways you can minimise your risk of slippage in trading. For example, you could avoid large market-moving events, opt to trade on lower volatility markets or those with higher liquidity.

But given that this reduces the opportunities available to traders, the most common way of avoiding slippage in trading is by applying guaranteed stop-loss orders (GSLOs) and limit orders to positions.

Guaranteed stop-loss orders

A guaranteed stop loss is an order that closes your trade at the exact level chosen by you, regardless of price slippage. A regular stop loss may incur slippage in times of heightened volatility but with a guaranteed stop, we take on the risk of slippage for you.

GSLOs are free to attach, but you will be charged a premium if your order is triggered. You can attach and amend your GSLOs within our market hours for free, but minimum distances do apply and are shown in the deal ticket for each market.

Learn about orders and positions

Limit orders

Limit orders are instructions to execute a position at a price that is more favourable than the current market price. So, your order will be filled at the specified price or better, meaning slippage doesn’t apply.

For a sell (short) order this would be at the desired price or a higher price, whereas for a buy (long) it would be at the specified price or a lower price.

If the order cannot be executed under these terms, it will likely be rejected. However, it’s important to check how your specific broker treats limit orders before trading.

What is slippage tolerance?

Slippage tolerance is a setting in trading platforms that allows you to determine how much price slippage you’re willing to accept so that your order can be executed.

If the market does slip, and you haven’t set a price tolerance, your broker will just accept the next available market price. But setting a price tolerance means that you can limit this difference, giving you more control over your risk.

With City Index, you can amend your price tolerance level in the market information section for each asset. And if you want to remove the tolerance completely, you can set it to zero. But if the execution price moves, your order will fail, and you’ll have to submit a new request.

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.