Why does slippage in trading occur

A brief definition of slippage

First, let's briefly recall how a slip can be defined. Slippage is defined as the difference between the price at which you want to execute your trade and the price at which it is actually executed by a broker or liquidity provider. There is always a certain, albeit very short, time between each of your clicks to open/close a position (or to stop-loss, take-profit, and other pending orders). The length of this time then often determines the size and nature of the slip (whether it’s positive or negative).

Why Slippage occurs

1. Low liquidity

   If you are one of those traders whose strategy is based trading of exotics, ie currency couples that are not being traded often, you should expect slippage to occur. That’s because in exotic currencies markets there’s a lower liquidity, and what we know for a fact is that when there is a lower liquidity it can take an extended period of time for a counterparty to match your order. Although when we mention “longer period of time” we still mean fractions of a second. Nevertheless, even that’s enough time for market price to change.
    

   The most popular exotic currencies include:

   
   HKD – Hong Kong Dollar
   MXN – Mexican Peso
   CNY – Chinese Yuan
   SGD – Singapore Dollar
   KRW – South Korean Won
   ZAR – South African Rand
   RUB – Russian Federation Ruble
   INR – Indian Rupee
    

2. High volatility

   Important macroeconomic events, press conferences with a significant economic impact, or the even slightly heated tweet exchange between representatives of hostile states can all lead to high market volatility. The situation where the price level "shoots" up and down is then an ideal environment for slips to occur. So if you are one of the traders who are looking for volatile markets, we recommend you to be wary of slips. Or at least pay attention to them.
    

3. Big volume trading

   Slippages also tend to occur in cases where traders operate with large trading positions. Each market has a certain depth of liquidity. This can be imagined as a kind of ladder with rungs on which pending orders from individual institutions and liquidity providers are placed.

   At the top rung is the best price available for which institutions are willing to trade at the moment, the so-called "top of the book". This price actually corresponds with the price that you see in the platform and it’s probably also the price you demanded. Orders with a price, further away from your ideal, are then placed on the lower rungs.

   Each of these rungs is able to fill only a certain, predetermined, volume (often only in the order of a few lots). So if you intend to trade a higher volume position (tens of lots), you must take into account that it could be divided on the interbank market and traded at prices distributed over several rungs. The final price will thus correspond to the weighted average from across multiple rungs, and thus there will be a slip from the originally demanded price.

   To make matters more difficult, it can happen, for example, that due to a large trading position, your order will "eat up" the depth of the market and a negative slippage will appear. However, due to the rapid change of price in your favor, the resulting slip you will see on the platform will be positive.

How to tell if your broker is being honest

As we mentioned in the introduction, both negative and positive slippage is a natural part of trading. It is therefore necessary to take them into account. Ideally, the slips should be evenly spaced. This should result in approximately the same number of negative and positive slips. However, what you should pay attention to is the way your broker handles the slips.

The privilege of a quality broker is, in addition to the even distribution of positive and negative slips, also to admit positive slips to his clients in the event that they occur.

A "healthy" slippage distribution can be identified with the help of graphs of their distribution. A fair broker should have no problem showing you these charts on request. At Purple Trading, we list them directly on our website. Take a look at the Purple Trading slide distribution chart.

In conclusion

We hope this article has helped you to understand the issue of slippage in trading a little better. We believe that you will find the information obtained useful in developing your own unique trading strategy. If you are interested in a regular supply of good quality information and at the same time would like to trade with a broker who handles slippage distribution fairly, do not hesitate to try Purple Trading.