Trading can be a complicated phenomenon. To be able to trade well, it may take many years. Even experts have to go through days where what they expected and what they actually lose or gain are totally different. Because markets fluctuate, there are many factors that can influence the price of assets. Slippage is an excellent example of this phenomenon. You may be wondering what slippage is. This blog will explain what slippage is, and give you all the information you need about this common phenomenon in financial markets.
Let's start with the basics, and then we will discuss the meaning of slippage. Slippage is the difference in the price at which a trade will be executed and the price at which it was placed. It happens when an order you place on the exchange is executed at another price than you requested.
Let's say that you made a request to the exchange for 10 shares of a company worth Rs. Each one: 104 Slippage was the reason the order was not executed at Rs. 102 per share This is slippage. Sometimes, as in the above case, this can work in your favor since you can purchase the asset at a lower price. Slippage can sometimes work against you, and lead to unfavorable results.
Slippage is a common phenomenon in both the stock and forex markets. What is the cause of the difference in the requested and executed prices? Let's look into it.
Now you know what slippage means. It is a common problem. It may seem that slippage is an error at first glance. It isn't. Slippage can occur in highly volatile markets. It is impossible to request a trade at a particular price and have it executed at that time because the prices of assets traded fluctuate so often that it is difficult to ask for a trade at that price. Volatility markets can cause price changes so fast that the price of your order may change by just a few points. The order may be executed at a lower price than you anticipated.
In times of low liquidity, slippage can also occur. There are few market participants, which means there is little liquidity. It can be hard to find a buyer willing to buy the assets or stocks you are selling at the exact price you want. It can be difficult to find a seller willing to sell your asset at the price you want.
As we have briefly mentioned, slippage can either be good or bad. Let's look at some slippage examples and see how it plays out practically.
Let's say you want to buy the USD/INR pair at today's market rate. We'll assume that it is Rs. 70.20 After you fill out the order, you will find the lowest bid price available at Rs. 70.10. 70.10.
Suppose you want to buy the USD/INR pair at today's market rate. We'll assume that it is Rs. 70.20 After you fill out the order, you will find the lowest bid price available at Rs. 70.40 This price is higher than you expected, which results in a negative slippage.
Slippage can happen at any time. However, it is more common in volatile or less liquid markets. It is important to be careful if you want to avoid slippage. Avoid volatile markets. Avoid trading during major economic events, as these events can quickly impact asset prices. Limit orders can be used instead of market orders to reduce slippage. Your order will only get filled at the price you requested or at a higher one. You can eliminate the possibility of slippage negatively affecting trades by using limit orders.