Avoiding Slippage While Day Trading
When you have an immense demand of buyers and sellers, slippage can occur creating a headache for all those trading at that moment in time. Read on for concise and practical tips that will help you overcome the slippage challenge.
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- What is slippage and when does it happen?
- What causes slippage?
- 5 practical things you can do to avoid slippage
As most traders know, the financial markets move at lightning speed, executing orders in a blink of an eye. When you have an immense demand of buyers and sellers, slippage can occur creating a headache for all those trading at that moment in time.
What is slippage? What causes it and why can it become a problem? More importantly, what can you do to avoid your day trading from suffering from it? Read on for concise and practical tips that will help you overcome the slippage challenge.
What is slippage?
Simply put, slippage is when there is a different price than expected when entering or exiting a trade. When buying or selling on the forex market, the difference is usually just a few pips. However, in stocks and other assets, the difference can be a larger amount resulting in a more significant impact for your trades.
When does it happen and what causes slippage?
When you buy a stock, someone else must sell it. Same goes whenever you sell a stock, there is someone at the other end buying it. The broker is constantly trying to find buyers and sellers for a particular asset. Such transactions happen in microseconds and results in trades sold at a higher or lower price. For example, you might buy a stock at $100 but the order is executed at $90, you might make money if you are correct. However, this is a very rare case as slippage tends to go against the trader.
Slippage might happen due to the below 3 main reasons:
Slippage tends to occur during times of high volatility, possibly caused by market moving news such as economic data or an international event. This makes it quite difficult to execute orders at the expected price. When there is high volatility, brokers would be quite busy trying to accept orders, resulting in price differences, unless there is a limit order to stop the trade at a particular price.
Low liquidity happens when there aren’t enough buyers and sellers in the market. Although this is very rare, it can cause a delay to happen and slippage occurs.
Issues with Technology
Technology is an integral part of trading, especially online trading. Technical issues when orders being executed may cause delays and so slippage tends to happen.
3 Tips to Avoid Slippage:
Tip #1: Use a Limit Order
To enter or exit a trade, most traders tend to place a market order. A market order may fill at a worse price. However, if you place a limit order it ca only fill at the price you want it or even better, avoid slippage altogether. The disadvantage of a limit order is that it can only be fulfilled when there is enough supply for the stock when it reaches your price and when the stock reaches the limit you set.
Tip #2: Avoid Trading During Major News Announcements
You might be tempted to trade during major financial announcements or international news events due to the opportunities they present. However, getting in and out at the price you want might be challenging.
If you had already placed a position and news is announced, you might experience significant slippage on your stop-loss. Make sure you keep up to date with an economic calendar so you know whether you should place trades or not or at least be aware of what might happen to your orders should you still decide to place orders.
Make sure you check out Sage FX’s News section regularly to read about major news events occurring within the financial markets.
Tip #3: Focus On Currency Pairs That Have High Liquidity
If you want to avoid slippage altogether you can focus your trades on popular assets with high liquidity such as EUR/USD and USD/JPY. The fact that lots of people are buying and selling within this market tends to place it at a low-risk area for slippage. Make sure you still keep up to date with news surrounding the currency pairs as volatility might still occur if there are important events surrounding the currencies.