No matter how experienced you are as an investor, there’s a good chance that you’ve been the victim of slippage at some point in your career. Slippage occurs when the entry or exit price of a trade is different than what you were expecting. For instance, imagine you are processing a deal through an online exchange the price increases by five cents in the time it takes to be filled. If you’re purchasing 1,000 shares, slippage will cause you to pay an additional $100.
Fortunately, there are two key strategies that traders can implement to reduce the impact of slippage. Traders will either develop advanced trading strategies or will look to streamline their technological infrastructure. However, although these are the two most common methods used to avoid slippage, they are not the only two ways in which its possible.
Understanding Your Trading Strategy Can Help You Avoid Slippage
If you are interested in long-term holdings, then slippage should not be a primary concern. For instance, if you’re depositing money into a Roth IRA, the difference of a few cents won’t matter much in the long run. However, if you’re participating in the live market, the slippage could cut down on your ability to be successful as a trader.
One of the reasons for this is because of volatility. Investors should make sure they understand the depth-of-market of a product, as well as its activity levels. For example, a product with elevated activity levels will subject traders to slippage more than an asset that is not as popular. If possible, investors should look to participate in markets that are liquid and not volatile.
Your trading strategy also comes into play when it comes to inefficient order types. If you are an investor trading frequently, you should know that the cost of using market and stop-market orders as a means to enter and exit a market can add up quickly. Filling an order at the “best available price” can often be much different than the ideal price that a trader had in mind.
Lastly, those with high trade frequencies and small profit targets are likely to be most impacted by slippage. By placing high-volume trades, investors are likely destined to underperform. Traders participating in this strategy will need to take significantly more steps to maximize their efficiency.
Understanding How Broker-Side Options Could Increase Efficiency
Another way to help reduce the risk of slippage is by working with a reputable broker. Investors should look to find a reputable brokerage that meets their trading goals. Some brokers tailor their services explicitly to help investors who are concerned about slippage. Brokers also provide direct market access. Not having to route trades through an intermediary should help streamline the transaction, providing a more accurate price point.
Slippage Doesn’t Have To Be Your Downfall
Slippage has burned even the most experienced of investors, but it doesn’t have to be your downfall. If you have a sound technical understanding of your trading strategy, you’ll be in a much better position for success. Hiring a brokerage could also be an investment well worth making.
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Your broker may have a contractual agreement not to seek redress for slippage, it’s obligation to execute stop loss orders at the stop loss price or better, will not apply to limit and stop loss orders during hours when it is closed. This also does not include bad price spikes. Bad price spikes are removed from the price charts quickly to alleviate confusion.