Slippage occurs when your trade executes at a different price than the one you specified or expected. You place a market order to buy EUR/USD at 1.0850, but the order fills at 1.0853 — the 3-pip difference is slippage. It's a transaction cost beyond the spread, and it's unavoidable in practice, though its magnitude can be managed.
When Slippage Occurs
Market orders in fast-moving markets: When price is moving rapidly (news events, market opens), the price can shift between when you click "buy" and when the order reaches the exchange. The more liquid the instrument and the calmer the market, the smaller the slippage.
Stop loss execution: When your stop loss triggers, it becomes a market order. If price gaps through your stop level (an overnight gap or a news-driven spike), your order may fill significantly below your stop price. This is called gap slippage and is one of the main risks of holding positions overnight.
Large orders in thin markets: A large order in an illiquid market will consume multiple price levels in the order book, with later fills at progressively worse prices. This is most relevant for high-volume traders in small-cap stocks or less liquid crypto pairs.
Minimizing Slippage
- Trade during peak liquidity hours (London–New York overlap for forex)
- Use limit orders instead of market orders where possible
- Avoid entering positions immediately before major economic announcements
- Choose instruments with high average daily volume and tight spreads
Accounting for Slippage in Risk Calculations
For accurate risk management, add an estimated slippage allowance to your stop loss distance. If your stop is 30 pips from entry and you estimate 1–2 pips of slippage on exit, your effective risk is 31–32 pips, not 30. For strategies with tight stops or news-driven entries, slippage can meaningfully change the actual risk per trade.