The Futures market is a fast and active place where traders buy or sell contracts for assets at a set price. Despite offering profit opportunities, challenges like slippage occur when expected and actual prices don't match. Slippage is common and affects traders' profits. Understanding why slippage happens, such as market changes and liquidity issues, and using strategies to manage it, can help traders trade more confidently and improve their overall performance.
Click below to watch an informative video from Mick, one of Topstep's Risk Managers, as he explains how slippage works.👇
Frequently Asked Questions
What is slippage?
Slippage occurs when an order is executed at a price different from the expected price. This usually happens during periods of high market volatility or rapid price movements, when the price can change significantly between the time an order is triggered and when it is executed. Slippage is a direct result of two things: the order type selected and the market state.
Why does slippage happen?
Slippage happens when there is a lack of market depth or aggressive buying over selling between placing an order and its execution. In fast-moving markets, prices can change rapidly, and there might not be enough liquidity at the desired price level, causing the order to be filled at the next best available price.
Does slippage only happen in simulated trading?
No, slippage occurs in both simulated and live trading. In simulated trading, platforms attempt to simulate real market conditions, including slippage, to provide a realistic trading experience.
How do stop-loss orders respond to slippage?
Stop-loss orders are designed to limit losses by converting to market orders when a specified price is reached. Market orders guarantee fill, but not price, so in fast-moving markets, the execution price may differ from the stop price due to slippage, leading to larger-than-expected losses.
What is the difference between a stop-loss order and a stop-limit order (the order type you select will determine if you may or may not receive slippage).
A stop-loss order (aka stop market order) converts into a market order when the specified stop price is reached. It will execute at the best available price based on the bid/offer at the time, which can result in slippage. The more volatile the market, the more slippage that can be incurred.
A stop-limit order converts into a limit order when the stop price is reached, and it will only execute at the specified limit price the order was entered or better, reducing the risk of slippage at the risk of not being filled and the markets continuing to move against you.
Can slippage be completely avoided?
Yes, but only with Stop Limit Orders, which do not offer guaranteed fills and could lead to greater losses. While slippage can be avoided, traders should really protect themself from risk on open positions with stop orders because stop limit orders can leave traders with open positions and risk on left behind and unfilled. Other ways to avoid slippage:
Avoid trading during major news events or economic announcements that can cause rapid price movements.
Trading only during times of high market liquidity.
Can slippage affect both buy and sell orders?
Yes, slippage can affect both buy and sell orders. For buy orders, slippage occurs when the order is filled at a higher price than expected, and for sell orders, it occurs when the order is filled at a lower price than expected.
Does slippage occur in all financial markets?
Slippage can occur in all financial markets, including stocks, Forex, futures, and cryptocurrencies. It is more prevalent in markets with lower liquidity or during periods of high volatility.
When am I most exposed to slippage?
Although slippage can be experienced at any time, it’s most likely to occur around:
Periods of High Volatility
Illiquid Markets/Low Market Depth
Price Action Around Swing Highs and Swing Lows
Market Open and Close or Breakouts from Opening Ranges
Causes of Slippage:
1. Market Volatility
Market volatility is one of the primary reasons for slippage in the futures market. During periods of high volatility, price movements can be rapid and unpredictable. This can result in a delay between the time an order is placed and when it is executed, causing the actual execution price to differ from the intended price.
2. Liquidity
Lack of liquidity in a particular futures contract can contribute to slippage. When there are fewer buyers and sellers in the market, it becomes difficult to execute large orders at a specific price. Traders may experience slippage as the market adjusts to accommodate the order size.
3. Gaps in the Market
Overnight or weekend gaps in the market can lead to slippage. If significant news or events occur when the market is closed, prices may open at a different level than anticipated. Traders with existing orders may experience slippage as their orders are executed at the next available price.
Slippage Mitigation Strategies:
1. Limit Orders
Traders can use limit orders to specify the maximum or minimum price at which they are willing to buy or sell. By setting a limit, traders have more control over the execution price, reducing the likelihood of slippage.
2. Be Vigilant
Keeping a close eye on market conditions, especially during periods of high volatility, is crucial. Traders can adjust their strategies or temporarily refrain from trading during extreme market conditions to minimize the risk of slippage.
3. Risk Management
Having robust risk management practices in place is essential for mitigating the impact of slippage. Traders should set stop-loss orders and position sizes that align with their risk tolerance, preventing significant losses in the event of adverse price movements. Never risk more than you are willing to lose.
Why wasn't my order filled / It blew past my stop
Why wasn’t my order filled?
If your order wasn't filled, it might be due to the current market conditions. If there's low liquidity or high volatility, it can be challenging for the order to find a matching counterparty at the specific price you set. Also, the type of order you place affects how it gets executed. Market orders are filled at the best price available, but sudden market shifts can cause the actual price to differ from what you expected. Checking the time and sales data can give you more insight into what's happening.
It blew past my stop!
During volatile times, the market can unexpectedly shift, potentially triggering your stop-loss order at a different price than expected. Market gaps, especially at openings, can cause this, leading to slippage where execution prices differ. Review your trading plan and adjust stop-loss levels based on current conditions to better match your risk tolerance.
How can I tell if I was affected by slippage?
If you're unsure whether or not your order was affected by slippage, take a look at the tips below.
1. Review Trade Execution
Examine entry and exit prices.
Compare the executed prices with your intended levels.
2. Compare Expected and Actual Prices
Assess the difference between the anticipated prices and the prices that were actually executed.
3. Analyze Order Types
Note that market orders are more susceptible to slippage than limit orders.
Stay mindful of possible deviations from the current market price.
4. Check for Volatility
Closely evaluate the market conditions during your trade for heightened volatility.
5. Evaluate Fill Time:
Consider delays in order execution as potential contributors to slippage. If you see a significant gap, slippage likely occurred. Remember, slippage is very common in dynamic markets, and the impact of slippage will vary based on market conditions and which order types were used.