Slippage
Candlefocus EditorWhen a market order is requested, the bid/ask spread between the buying and selling prices is constantly changing. For example, if a trader puts in a market order to buy at the best available price, but before the order is filled the ask price rises, the trade will be filled at the higher price, resulting in slippage. Similarly, if a trader puts in a market order to Sell, but before the order is filled the bid price drops, the trade will be filled at the lower price, resulting in slippage.
It is important to note that slippage is not the same as poor execution. A poor execution would occur when a dealer orders an order to buy a security, but the order does not get filled until much later. In this scenario, the trade was not executed at the desired price, but it was not due to slippage. Rather, it was due to a lack of liquidity.
Slippage is not limited to just buying and selling securities. It can also happen when trading options and futures, in addition to making currency trades. To reduce the impact of slippage, it is important to choose the right trading platform. Some platforms, such as MetaTrader 4, provide more control and access to current market data, helping to reduce slippage risks. Other strategies that can be used include the use of good risk management practices, such as setting predetermined stop losses, and analysing results to identify slippage patterns.
In conclusion, slippage is a normal part of trading. Between market order requests and the time an exchange or other market maker executes the order, the bid/ask spread may change, resulting in a different execution price than the one originally intended. Traders need to be aware of slippage and take proactive steps to mitigate risks where possible. This can be done by understanding how their chosen platform works and how the markets work in general, as well as employing a good risk management plan.