In trading and investment, having a well-structured trading plan is essential for both traders and investors. This plan outlines detailed strategies, including target price levels for buying or selling assets. However, not all strategies yield the expected results. Sometimes, external factors force you to execute trades at prices different from your planned levels—a phenomenon known as slippage.
What Is Slippage?
The term "slippage" derives from the idea of "slipping" away from an intended outcome.
In trading and investing, slippage refers to the difference between the expected price of an asset and the actual executed price.
Example:
- You plan to sell shares of BBCA at IDR 7,500 per share. Due to market conditions, the trade executes at IDR 7,000. The IDR 500 difference represents slippage.
Slippage can also occur when large-volume trades face insufficient market liquidity. For instance:
- If you attempt to buy 1,000 lots of BBCA shares but sellers aren’t available at that volume, your order may delay or execute at a less favorable price.
👉 Learn how to optimize your trades with minimal slippage
Positive vs. Negative Slippage
Slippage isn’t always unfavorable. It can be beneficial when:
- Buy orders execute below the expected price.
- Sell orders execute above the expected price.
While slippage is common across all trading instruments, proactive strategies can mitigate its risks.
Slippage Tolerance Explained
Slippage tolerance defines the acceptable range of price deviation before a trade cancels. Commonly used in crypto trading, it ensures orders only execute within predefined limits.
Example:
- Buying an NFT for 100 BTC with a 2% slippage tolerance means the trade won’t proceed if the price exceeds 102 BTC or drops below 98 BTC.
This feature is critical for traders using market orders, where execution prices aren’t guaranteed.
Causes of Slippage
1. Market Liquidity Gaps
Slippage often arises from mismatches between buy/sell orders in highly volatile or illiquid markets.
2. Market Orders
Executing trades hastily via market orders—especially during urgency or FOMO—increases slippage risks by ignoring bid/ask spreads.
How to Avoid Slippage
1. Set Slippage Tolerance
Define acceptable slippage thresholds in your trading plan. Many forex brokers offer tools to automate this.
2. Use Limit Orders
Limit orders ensure trades only execute at your specified price/volume, though they may delay opportunities.
👉 Discover advanced order types to reduce slippage
3. Avoid High Volatility
Postpone trading during events like:
- Major economic announcements (e.g., Non-Farm Payroll reports).
- Company scandals triggering sell-offs.
4. Refine Price Predictions
Accurate price forecasting reduces slippage. Leverage research from:
- Securities firms’ analyst teams.
- Premium stock-screening tools.
FAQ
Q: Is slippage avoidable entirely?
A: No, but its impact can be minimized through strategic order types and market timing.
Q: Does slippage affect all asset classes equally?
A: Slippage is more prevalent in low-liquidity assets (e.g., small-cap stocks, exotic forex pairs).
Q: Can slippage be profitable?
A: Yes, if trades execute at better-than-expected prices.
Q: How does slippage tolerance work in crypto?
A: It automatically cancels orders if prices exceed your set deviation percentage.
By implementing these strategies, traders can navigate slippage effectively, balancing risk and opportunity in dynamic markets.
### Key SEO Keywords:
1. Slippage
2. Trading strategies
3. Limit orders
4. Market volatility
5. Slippage tolerance
6. Liquidity gaps
7. Price forecasting