In financial trading, slippage refers to the difference in price between the price an order was intended or expected to be filled and the actual price an order was filled.
Slippage is a very contentious issue among retail traders, which can lead to issues. Many traders view levels of slippage at brokers as a key determinant for their business.
For example, in forex trading, if a trader places a trade intending to enter a buy on the EUR/USD at 1.1080, but they only get into the market at a price of 1.1078, the slippage here would be two pips.
Naturally, there is always going to be a time delay between the trader buying or selling a financial instrument, and the time that the broker is able to execute the order, even if it’s only a few milliseconds, the delay is still there.
Why Slippage is an Issue in FX Trading
The issue of slippage is exacerbated in high volatile markets, such as the foreign exchange market in particular, as prices can and do change within these few milliseconds, causing the order to be executed at a different price to what was originally requested.
Slippage takes one of two forms. Either it is negative slippage, i.e. if the trader enters the market at an inferior position to what they requested.
Positive slippage, i.e. if the trader enters the market at a superior position to what they requested, which is welcome of course.
For example, if a forex trader places a trade on their broker for buying the USD/JPY at 113.05, but the broker fills the order at 113.08, it means the slippage here is a positive slippage of 3 pips.
Slippage is more common in forex trading during economic news releases, when price can fluctuate up and down wildly, known as whipsaws, making it virtually impossible to enter a trade at the intended price.
Slippage can also occur due to lack of liquidity, especially on large orders, where they might be an inadequate amount of interest from the other party, since ultimately, orders can only be filled at the requested price if there are enough buyers or sellers at the intended price and size of order.
To help eliminate or mitigate slippage, many traders rely on limit orders rather than market orders.
A limit order only fills at the price you want, or better. Unlike a market order, it won't fill at a worse price.