Demystifying the Impact of Trading Slippage on Your Investment Strategy

January 20, 2024


Trading in the financial markets carries inherent risks. Educated investors do everything possible to develop an investment strategy that accounts for normal ebbs and flows while limiting the potential for significant losses. The most effective strategies address the issue of trading slippage and include safeguards to reduce its impact on the overall portfolio.

Here, Black Eagle Financial Group, one of the most trusted prop trading firms in California, explains what trading slippage means and how it can affect your trading strategy. We also offer tips on managing slippage and avoiding it as much as possible.

What Is Trading Slippage?

Slippage is when the price of a trade at execution differs from the requested price. It can be either positive or negative. 

If you make a buy order at a specific price, and the trade occurs at a higher price, it causes negative slippage. If the price at the time of the trade is lower than the specified buy amount, then the result is positive slippage. 

Any time there’s a variation between the intended or requested and executed trade prices, there is slippage. Price changes can happen quickly due to micro-second transactions, and the effect can be substantial. A difference of just a few cents per share can add up when you’re trading many shares, so it’s important to monitor your trades and take steps to reduce the impact of trading slippage. 

Why Slippage Occurs 

Slippage can occur for several reasons. 

Volatile Markets

During periods of high volatility, prices change quickly, often within just a few seconds in the time gap between placing an order and filling it. 

Low Liquidity

If you’re trading on markets with low liquidity, there are fewer participants, so the time gap between placing and filling an order is often longer. This extended wait allows for more fluctuations in the market prices. 

Trading on Less Popular Currency Pairs

Slippage in Forex trading occurs on less popular currency pairs because they are more volatile and have lower liquidity. More popular currency pairs in foreign markets are less likely to have negative slippage because the trades occur more quickly, reducing the risk of fluctuations in the time gap between the order and its execution.

Opening and Closing Positions

Holding a position after the market closes can cause slippage because market prices upon opening can change due to events that take place during off hours. 

News Events

Slippage is common when the market turns volatile due to major financial news, like earnings reports, announcements about interest rates or monetary policy, or significant management changes within large organizations. 

Although investors should expect and plan for trading slippage, it’s possible to reduce the effects with a few careful investment strategies. 

Reducing the Effects of Slippage 

It’s imperative to account for slippage in your investment and trading plans because it can significantly impact the overall trading costs. By calculating the average slippage and including it in the fees, commissions, spreads, and other trading costs, you’ll get a more accurate assessment of how much you need to earn to make a profit on your trades. 

Calculating the average difference between your trade’s expected and actual prices can also help you identify trends and develop the best approach to minimizing losses. However, regardless of your portfolio trends and types of orders, there are some strategies that any trader can use to reduce trading slippage.

Trade During Periods of Low Volatility and High Liquidity

The best way to avoid losses is to focus on trading when the market is calm and there’s a better chance of completing transactions at your requested price. Trading when the market is active also helps ensure that your trades move at the desired pace since there is plenty of liquidity. This means trading on the U.S. stock market when the American stock exchanges are open and trading Forex when the London Stock Exchange is open. 

Manage Market and Limit Orders

A market order means automatically executing orders as quickly as possible when the price reaches your desired level. However, this can mean paying more for your shares in a volatile market. 

Setting a limit order can prevent this from happening. A limit order ensures that your orders only go through at your desired price or better. For example, if you wish to purchase shares at $100, the limit order guarantees that you’ll pay $100 or less.

Although this approach eliminates the possibility of negative slippage, it also creates the risk that your order won’t go through at all. You could miss out on potentially lucrative trades without careful management of limit orders. 

Use Guaranteed Stops 

A guaranteed stop ensures the execution of a trade at only the desired price. This eliminates any slippage risk. However, guaranteed stops also typically incur extra charges, which could negate their benefit by causing you to pay more than expected, so use them sparingly.

Avoid Major Market Events 

Successful trading requires monitoring the news for events that could have significant market-changing potential and knowing how to respond to reduce their impact on your portfolio. Keeping up with the calendar and news about the assets you want to trade can help you gauge which direction the price will go and avoid making trades in periods of significant volatility. Committing to a position before a company announces major news can result in greater-than-anticipated risk and bigger losses. 

Specify a Slippage Tolerance 

One way to avoid excess negative slippage is to set a tolerance with your broker. The most common amount is 2%, which means you authorize an order for 2% more or less than the desired price. 

Minimize Slippage With Trading Help From Black Eagle Financial Group

Slippage can affect any trader, regardless of the size of the portfolio and their experience in the markets. With guidance and assistance from the experts of Black Eagle FinancialGroup, you can enhance your approach to trading and make smarter, more strategic, and more potentially lucrative decisions. 

Black Eagle Financial Group brings together the best elements of a hedge fund, prop reading firm, and financial services company to provide the personalized support that investors need to take their trades to new heights. We provide the secure capital and infrastructure you need at competitive prices, along with experienced insights and professional support that keep you in the driver’s seat. Let us help direct your buying and selling orders using a range of tools that protect your trading capital, keep costs in check, and put you on track toward the highest profits possible. Learn more about whether Black Eagle Financial Group is the best prop trading firm for your investment needs by calling us toll-free at (833) 253-2453 or emailing [email protected]. We’re happy to answer your questions about how we can improve your approach to trading and maximize your investments without excess trading slippage. 

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