Slippage occurs when investors cannot trade event contracts at the expected price. This article will cover what slippage is, how it works, and how to avoid it when trading.
What is Slippage?
Slippage refers to the difference between a trade’s expected and actual price. It is a quite common occurrence when buying and selling contracts.
When you trade, you have in mind a specific price at which you will buy or sell. However, because the market moves fast, the price can change when your order enters the market and when the trade is completed.
You can thus end up buying or selling at a higher or lower price than you had intended. Slippage pertains to that difference between the price you had in mind and the price you had to settle for.
Example of Slippage
Trading slippage plays a vital role in your strategies.
Suppose you intend to buy YES for an event at INR 20.00 as the visible market order price on Tradex. You place your order, but when it is finalized, you realize that it has been filed at a higher price of INR 20.50.
This scenario is an example of negative slippage because you bought an order at a higher price than you intended, decreasing your money’s total buying power.
On the other hand, positive slippage happens when you place a buy order at INR 20.00 but finalize it at only INR 19.50. The lower price increases your purchasing power.
Why does Slippage occur?
Slippage generally occurs when there is low market liquidity or high volatility. This is because, in low liquidity markets, there are fewer market participants to take the other side of a trade, and so more time is required between placing the order and the order getting executed after a buyer or seller has been found.
That’s why you must know and understand what slippage is, as it can impact you as a trader.
How to avoid Slippage?
Trading in markets with low volatility and high liquidity can limit your exposure to slippage. This is because low volatility means that the price is less inclined to change quickly, and high liquidity means that there are a lot of active market participants to accommodate the other side of your trades.
You can also reduce your exposure to slippage by limiting your trading to the hours that experience the most activity because this is when liquidity is highest. Therefore, there is a greater chance of your trade being executed quickly and at your intended price.