Slippage

What Slippage Really Means

Slippage is the difference between the price we expect when submitting an order and the price at which the order is actually executed. It is not automatically a broker error and it is not always negative. In a rising market, a buy order can fill above our reference price; in a falling market, a sell can fill below it. Positive and negative slippage are possible, although adverse slippage is the main risk traders usually notice.

The practical importance of slippage depends on the strategy. If our target is a 15% swing, a few basis points of slippage may be relatively small. If our expected edge is a 0.3% intraday move, the same execution difference can consume a meaningful part of the trade’s expected value. This is why a strategy cannot be evaluated only with chart entries and exits. Execution costs belong in the model.

Where Slippage Comes From

Slippage tends to increase when liquidity is poor, spreads widen, volatility rises or the market moves rapidly. Around news releases and session transitions, the available liquidity at the displayed price can disappear quickly. A stop order can therefore trigger at one level and fill at another. The farther the actual fill moves from our planned price, the larger the realized risk can become.

We should measure slippage in a consistent unit. For a stock, we can record expected versus actual fill in currency and basis points. For a long entry, adverse slippage is actual fill minus expected entry; for a short entry, the sign convention reverses. The important point is consistency. We can then compare slippage across instruments, sessions, order types and market conditions.

Slippage as a Trading Cost

Consider a strategy that appears profitable before costs: average gross profit per trade is 0.50%, while spread, commissions and average adverse slippage together consume 0.22%. The remaining 0.28% is what the execution process must support before considering other sources of variability. If volatility doubles and slippage rises to 0.40%, the same strategy may no longer have a robust edge.

The trader’s response should not simply be “use tighter stops.” Instead, we can improve the whole execution process: trade more liquid instruments, avoid known illiquid periods, use appropriate order types, reduce size when the order may move the market, and include realistic execution assumptions in backtests.

How We Control It

A mature trading journal therefore records execution quality, not just P&L. Over a sufficiently large sample, slippage becomes measurable rather than something we complain about after a bad fill.

Practical Takeaway

For a trader, the point is to turn the concept into a decision framework: when the setup is valid, when execution quality deteriorates, and when we should stand aside.

Key Terms

• slippage
• spread
• market liquidity

Knowledge Check

1. What is slippage?
2. Which market conditions tend to increase slippage?
3. Why should slippage be included in strategy testing?