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Slippage can have both positive and negative impacts on a trader's performance. Positive slippage occurs when the trade is executed at a more favorable price than expected, while negative slippage occurs when the trade is executed at a less favorable price.
Slippage depends on a few key factors that make each security different in terms of slippage and overall liquidity, which is why certain stocks and currency pairs are more favorable for day-trading than others.
Some of the most important factors that contribute to slippage include:
- Market Volatility: In highly volatile markets, prices can change quickly, leading to slippage as the execution price may differ from the expected price
- Liquidity: Slippage tends to be more significant in less liquid markets where there are fewer buyers and sellers. In such cases, large orders may cause substantial price movements
- Order Size: Larger orders may experience more slippage, as they can exhaust the available liquidity at a particular price level
- Market Orders: Market orders, which are orders to buy or sell at the best available price, are more prone to slippage. This is because the actual execution price can be different from the displayed price when the order is placed
- News or Events: Sudden news announcements or significant events can lead to rapid price changes, resulting in slippage
How To Minimize Slippage When Trading
There are a few ways to minimize the impact of slippage on your trades. The first, and the most obvious method, is to focus your attention on highly liquid instruments, which includes large-cap stocks and major currency pairs, which tend to be less volatile and enjoy a stable stream of liquidity on their respective markets.
Another way of reducing slippage is to place limit orders on specific prices, which makes sure that the order is filled at the limit price only.
For example, if the price of Amazon stock (AMZN) is hovering between $146.05 and $146.30 over a space of a few minutes. Placing a limit buy order at $146.20 can help you reduce slippage and only buy at that specific price, at which point your slippage may be a couple of cents. Of course, this also depends on the amount of shares you are buying. If you choose to buy a large volume of shares, this will also affect the going market price of the stock.
