In a fast market, positions may be filled at worse (or better) price than requested. Slippage is the difference between the expected price of a trade by the investor, and the price the trade actually executes at, from the broker or market maker. Slippage often occurs during periods of higher volatility, news and Data releases, when market orders are used, and also when large orders are attempted, when there may not be sufficient “liquidity” at the requested price level, to execute the trade.
Slippage is a term often used in both Forex and stock trading, and although the definition is the same for both, slippage occurs in different situations for each of these types of trading.
In Forex, slippage occurs when a limit order or stop loss occurs at a worse/better rate than originally set in the order. Slippage often occurs when volatility, perhaps due to news events, makes an order at a specific price impossible to execute. In this situation, most Forex dealers will execute the trade at the next best available price.
Slippage in the trading of stocks, often occurs when there is a change in spread. In this situation, a market order placed by the trader may get executed at a worse than expected price. In the case of a long trade, the ask may have increased. In the case of a short trade, the bid may have lowered. Traders can help to protect themselves from slippage by avoiding market orders when not necessary.
Generally slippage is only a few pips however, in extreme circumstances it can become much greater. If you defiantly want to get into the deal at that time sometimes it is best to give a “trader range” a certain number of PIPs you are willing to allow the broker to execute the deal at. Fundamental news traders are most commonly prone to slippage. For example, if you wish to trade EUR/USD at the exact time of the N.F.P. (non farm payrolls) announcement from the USA this usually has a strong impact on the market, this makes the markets volatile and therefore maybe harder to execute your order.
When dramatic market-moving news is announced or over the weekend, slippage can be much larger.
Usually, Stop-losses are NOT guaranteed, this means that under certain circumstances the trader could possibly lose more than his market price. There are a few brokers that will guarantee stop losses.
Please note that if “positive slippage” occurs, its up to the Broker to pass on this better price, to the client. This does not always happen.