How to Avoid Slippage while Trading?
We can completely understand what it feels like to get your order filled at a price that you didn’t choose. For some, it could prove to be a bonus and for others, it’s a shock which they didn’t ask for. In the simplest terms, slippage can be defined as a situation when an order gets filled at a different price than that on the expected price. Let’s understand what slippage is and how it can affect your trades.
What is Slippage and What you should know about it?
Slippage occurs when the price at which the order gets executed is not what was requested by the trader. This happens quite often due to high volatility. Depending on the direction of the price movement, the slippage can either be positive or negative.
When a buy order is placed, there are three possible outcomes that you should know about.
- No slippage when the order gets executed at the same price as requested by the trader.
- Positive slippage when a trader pays a lower price than the requested price because the price drops exactly before the order execution.
- Negative slippage when a trader pays a higher price than requested because the price rises exactly before the order execution.
How to Avoid Slippage while Trading?
Though it’s not possible to avoid slippage completely, there are ways that can help you minimize slippage to a great extent.
- Trade when there is Low Volatility and High Liquidity
In a low volatile market, prices won’t change quickly and in a highly liquid market, there will be a lot of market participants who can help you get your order filled at the best price possible. If possible, limit your trading to hours when the liquidity is the highest. This will increase the chances of your order getting filled at a price you want.
- Use VPS
Technical mishaps like poor internet connectivity, system failure, or power cuts are major reasons why traders face slippage. You can find brokers that offer VPS services so that you can take advantage of the best order execution at all times.
- Trade with Brokers with Great Order Execution Speed
There is no denying the fact that if the order that gets placed gets executed quickly; it can save traders from slippage to a great extent. If your broker’s order execution speed is slow, it will give more time for the price to change, and hence, more slippage will occur.
- Use Guaranteed Stops and Limit Orders
With guaranteed stops, you will be sure that slippage won’t occur and your trades will get executed at the price you requested. They work great when the market is moving against you. You can also use limit orders to mitigate the risks of slippage when you are just entering a trade. This can also help you take profits from a winning trade.
You might want to do everything possible to avoid slippage. Some brokers will still fill your orders at the worst price. But not all of them are the same. There are some brokers that offer reduced slippage so that your orders get filled at the best price. Some of them are:
Just check the trading conditions of the brokers you are planning to use through a small account, to ensure that you get the best of everything.
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