Price slippage in trading refers to the difference between the expected price of a trade and the actual price at which the trade is executed. It usually occurs in situations of high volatility, low liquidity, or when placing large orders in a market.
Here’s a breakdown of how it happens:
High Volatility: During periods of high market volatility, prices can change rapidly. If you place an order at a specific price, but by the time it’s executed, the market has moved, you may get a different price than you anticipated.
Low Liquidity: In markets with low liquidity (fewer buyers and sellers), it can be harder to execute trades at specific prices. If there are not enough people willing to buy or sell at your desired price, the order may be filled at a different, less favourable price.
Large Orders: When you place a very large order, especially in a market with limited liquidity, you might not be able to execute the entire order at a single price point. The order may get partially filled at different prices, resulting in slippage.
Market Impact: Placing large orders can also cause a noticeable impact on the market. If you’re trying to buy a large amount of a stock, for example, your buying pressure can drive up the price before you’ve completed the purchase, leading to slippage.
Gaps in Trading: Overnight or during times of low trading activity (like weekends), there can be gaps in trading. When the market opens, the price may be significantly different from where it closed, leading to slippage for orders placed during the gap.
Price slippage can work both in favour or against a trader. It can lead to better-than-expected prices, but it can also result in worse prices, potentially impacting profits or losses. Traders often use various strategies and tools, such as limit orders, stop orders, and algorithmic trading, to try and mitigate the effects of slippage.