Slippage

What is Slippage in forex and CFD trading

Slippage is the difference between the price at which a trader attempts to execute an order, the requested price, and the price at which the order is actually executed, the filled price. It is most common during periods of extreme volatility, such as major economic data releases, or when market liquidity is thin. Slippage matters for real trading decisions because it directly affects the trade’s final cost or profit, potentially causing stop-loss orders to execute at worse-than-intended prices or limit orders to fill at better prices. A trader can verify and measure Slippage by comparing the requested price recorded in the order ticket with the final execution price shown in the trade history, noting the difference in pips.

Key facts about Slippage

• Definition: Slippage is calculated as: Slippage = Requested Price – Filled Price.
• Occurrence: It primarily occurs with market orders and stop orders when the requested price level is no longer available in the order book upon receipt of the order by the broker’s liquidity provider.
• Direction: Slippage can be negative (worse price for the trader) or positive (better price for the trader), depending on the direction and speed of the price movement.
• Units of Measure: Slippage is measured in pips or the currency unit of the instrument, quantifying the execution cost variance.
• Cause: The fundamental cause of Slippage is the time delay between the order being placed, transmitted, and executed, allowing the market price to move rapidly.
• Risk Management: Slippage risk is highest when trading high-impact news events, requiring traders to consider price tolerance settings or alternative order types.

How Slippage works in forex and CFD trading

Slippage occurs as a mechanical consequence of latency and insufficient market depth, resulting in the broker filling the order at the next available price level when the requested price is missed.

The process involves these sequential steps:

1. Order Placement: A trader clicks to execute a market order at a price, Pr, or a stop order is triggered at Pr.
2. Transmission Delay (Latency): The order signal travels from the trader’s platform to the broker, and then to the liquidity providers (LPs).
3. Market Movement: During this transmission period, high volatility or low liquidity causes the best available price at the LP to move away from Pr to a new price, Pf.
4. Execution: The broker executes the order at the best available price, Pf, which is the filled price, because the volume at the requested price Pr has been consumed or the price has been withdrawn.
5. Resulting Slippage: The difference, Pr – Pf, is recorded as the Slippage.

Example of Slippage with a real trade

This example shows how Negative Slippage impacts the execution of a Stop Loss order on EUR/USD.

Instrument: EUR/USD (long position)
Position size: 1 standard lot (100,000 units)
Pip Value: $10/pip

Trade Parameters:

Entry Price (Buy): 1.10000
Requested Stop Loss Price: 1.09900 (Risking 10.0 pips)

Execution Scenario (Flash Crash):

Market Price moves rapidly through 1.09900.
Filled Stop Loss Price: 1.09875
Difference (Negative Slippage): 1.09900 – 1.09875 = 0.00025 or 2.5 pips

Impact Calculation:

Intended Loss: 10.0 pips × $10 = $100.00
Actual Loss: 12.5 pips × $10 = $125.00

Result: The Slippage resulted in an additional, unplanned loss of $25.00 for the trade.

How Slippage affects your cost and risk

Slippage represents an unpredictable cost that can increase execution expense and raise the risk of violating predefined risk parameters. For a broader understanding of various financial concepts, explore our comprehensive forex glossary.

Slippage compared with related concepts

Slippage vs Spread

Slippage is an unpredictable difference between the requested and filled price, occurring due to rapid price changes or insufficient depth, whereas the Spread is a predefined, visible cost (Ask – Bid) that is present in all executed trades.

Slippage vs Requotes

Slippage results in the order being executed at a worse (or better) price without further input from the trader, typical of No Dealing Desk brokers, whereas a Requote is a request by a broker (usually Market Maker) for the trader to re-confirm execution at a new price, typically leading to delayed or unexecuted orders.

Broker differences in Slippage across the industry

The incidence and type of Slippage are strongly influenced by the broker’s execution method and how they source liquidity.

How to verify Slippage on your trading platform

To mechanically verify the occurrence and magnitude of Slippage using MetaTrader 4 (MT4), follow these steps:

1. Disable One Click Trading (MT4): Open the MT4 platform and ensure One Click Trading is disabled to force a confirmation window.
2. Note Current Price: Open a new Order window for a major currency pair, noting the current Bid/Ask price shown.
3. Place Market Order During Volatility: Place a market order (Buy or Sell) during a high-volatility moment, such as a major news release time.
4. View Account History: After the order is filled, navigate to the Terminal window and select the Account History tab.
5. Display Order Details: Right-click the columns and select Comment to display the order details, which often includes the requested and filled price.
6. Compare Prices: Compare the price you saw when clicking Buy/Sell to the Price shown on the filled transaction line in the history.
7. Calculate Difference: Calculate the difference in pips: Filled Price – Requested Price.
8. Sanity check: If the trade was executed during a price spike, the Price in the history should differ from the price you saw on the ticket, indicating the exact Slippage incurred.