Slippage occurs in trading when the desired price of an order is not achieved due to rapid market fluctuations or delays in order execution. It can result in a trade being executed at a price different from the one expected. Slippage can occur in both directions, causing you to either gain or lose more than anticipated.
Slippage is common during periods of high market volatility or low liquidity, such as major news releases or market opening times.
Let's say you're trading a popular currency pair, EUR/USD, and you've placed a market order to sell 1 lot (100,000 units) at a take profit (TP) level of 1.1000 and a stop loss (SL) level of 1.1050.
Expected Outcome: You expect to exit the trade with a profit if the price reaches 1.1000 and to limit your loss if the price hits 1.1050.
Market Conditions: However, the forex market is known for its fast-moving nature, especially during economic releases. Just as your trade is about to be executed, a significant economic report is released, causing sudden volatility in the market.
Slippage Impact on Take Profit: Due to the rapid market movement, your take profit order gets executed, but not at the expected 1.1000 level. Instead, it's executed at 1.0995. As a result, you secure a profit, but it's slightly less than what you initially aimed for.
Slippage Impact on Stop Loss: Similarly, your stop loss order is triggered, but not precisely at 1.1050. It gets executed at 1.1055. While your risk is still managed, the loss is slightly larger than your original stop loss level.
In this scenario, slippage affected both your take profit and stop loss orders. It's important for traders to be aware of slippage and consider it when setting their trade parameters to account for potential variations in execution prices, especially during volatile market conditions.
In our trading environment this is simulated however is representative of live market conditions