This article discusses Slippage, a phenomenon that occurs with some frequency while trading, regardless of the market in question (although in some cases, the issue is more complex than in others).
It provides a definition of the phenomenon, lists the underlying causes, and proposes some solutions, one of which is completely free, although it may require some additional sacrifices.
A Definition of Slippage
But what is Slippage? In reality, this phenomenon is not often discussed. Traders tend to overlook it, either due to lack of knowledge or because they believe there is no remedy. A complementary look at the phenomenon is available in what it is, implications.
The truth is that it is absolutely vital for a trader to understand the meaning of Slippage and the consequences this phenomenon generates for speculative investment activities. This is because, albeit with some sacrifices (economic rather than technical), it can be somewhat contained or simply limited in its potentially harmful effects.
In any case, Slippage refers to the difference between the price recorded at the moment the trader places the order and the price recorded at the moment that same order is actually executed. That's right, there can be a delay between placing and executing an order such that the price undergoes changes.
In theory, the Slippage phenomenon can go unnoticed. However, if certain approaches and strategies are used, it dramatically affects trading to the point of compromising hopes of profit. This happens especially when the trader operates in a very short-term horizon, when doing intraday trading, and even more so when practicing scalping. Staying level-headed when the market moves against a plan like this is covered in avoiding emotional trading.
In these two cases, even the slightest price deviation, like the one that can occur in case of execution delay, can nullify a good trade planning activity, changing the cards on the table and effectively forcing the trader to invest almost blindly: simply put, the price you think you entered with is not the same price you actually entered with.
Slippage can also cause damage to those who practice a more long-term trading activity, perhaps multiday. The reference is to those who operate through a tight and extremely precise money management activity (which is also preferable).
The Causes of Slippage
But why does slippage occur? Well, there are at least two reasons, and moreover, they do not exclude each other: theoretically, but often also in practice, both contribute to the formation of Slippage. The following paragraphs analyze these two cases.
Volatility
Volatility is the main cause of the very existence of Slippage. Without volatility, there would be no Slippage, that is, there would be no price deviation in such a short period of time, as is the case (in most cases at least) that forms the background to Slippage itself. A concrete case where a volatility spike at a fixed daily moment creates exactly this kind of gap is examined in 4 PM Fixing (WM/Refinitiv).
This means that in some cases, even if there is a more or less accentuated delay between placing the trade and actual execution, Slippage may not occur. This refers, obviously, to particularly static markets, lacking sudden fluctuations, rather than particularly calm phases, although potentially temporary.
Technical Problems
At the root of slippage, or rather the delay between placing and executing an order, there could also be technical problems, very often an inability of the trading platform to immediately process trades. As already mentioned, many traders don't even notice the deviation, if not when the phenomenon has already occurred. Again, it depends on the approach used and the asset being traded.
In any case, the technical problems could concern either the platform or the infrastructure for which the trader is solely responsible, or both.
Infrastructure, in this context, refers to the simple internet connection which, in fact, is necessary for the execution of the order (as well as for the vast majority of the previous phases).
For one technical reason or another, therefore, a price deviation can occur and thus the Slippage phenomenon.
In this regard, it should be said that some platforms are better than others, but there are also tools that, cutting to the chase, solve the problem at its root.
How to Overcome Slippage
As already mentioned, slippage can be overcome. Obviously, this goal can only be achieved at the cost of some sacrifice, in some cases economic, more rarely of a technical nature. In essence, it is necessary to deploy skills. Here is a look at each approach in order.
Equipping Oneself with a Good Platform
The broker-platform combination, although many do not know it, has a clear impact on timing. If the broker and the platform are not fully compatible, even if the platform performs better than it should, Slippage is assured.
Therefore, it's worth changing the platform if it is too difficult to "fix". As in any other market sector, there are brokers and brokers, platforms and platforms. Some, it's useless to hide it, are clearly more performing than others.
Equipping Oneself with a VPS
This is an overall radical solution, also because not many adopt it. Yet the VPS can truly be a useful resource for those who, perhaps as scalpers or intraday traders, have an extreme difficulty in being able to make their order executable.
In this way, a VPS is a virtual machine sold as a service by a hosting provider, sharing the underlying physical hardware with other VPS but effectively moving trading activity from the home computer to far more performing computers. In this case, you can be sure that your order is executed on time. VPSs are especially useful for automatic trading when using Expert Advisors or Robots.
This approach, however, is not free. VPSs, in fact, cost money. These are not extravagant figures, but they are still fixed expenses.
Changing Strategy
The last approach does not require any effort from an economic point of view, unlike the other two. It involves modifying one's strategy by embracing a much broader time horizon and thus amortizing over time any distortion, even heavy, whose nature is essentially technical. This is the identikit that corresponds to the context in which many traders are forced to operate, with explicit reference to the volatility tendency of this or that asset.
In essence, one could switch from Intraday or Scalping Trading to a more measured Trading. Also because, over time, even the most sudden and deep fluctuations are reabsorbed.
