What is Slippage and How Does It Impact Your Trading P&L?

Slippage means having your orders fulfilled at a price different from what you saw on the screen when you placed the order. It is like paying $0.50 for an apple at a grocery store when you place your order despite the price posted being $0.49. A penny is nothing, but buying 1000 apples or 1000 shares with a penny slippage will total $10 per order.

Understanding the two main types of orders is crucial for any trader:

• Market order

• Limit order

Your slippage depends on what type of order you use.

Limit Order

A limit order says - give me the apple at $0.49. It guarantees the price but does not guarantee a fill. You will pay at most $0.49 per apple, but you may not have any apples.

Market Order

A market order says to give me that apple at any price. It guarantees a fill but doesn't guarantee the price. If the cost of the apples rises when you place the order, you may pay more than you saw on the screen when you pushed the buy button. You may also be hit by slippage.

Slippage on market orders rises with market volatility. When the market begins to run, slippage goes through the roof.

Do you have any idea how much slippage costs you?

There is only one way to find out: Write down the price you paid when you placed a market order, compare it with your fill, and multiply the difference by the number of shares or contracts. To remind you, good record-keeping is essential for your trading success. It would be best to watch your losses because you can learn from them.

Why use only limit orders?

You want to be in control and trade at prices that suit you. There are thousands of stocks and dozens of opportunities. If you miss a trade due to a limit order that is not filled, there will be countless other opportunities.

DO NOT OVERPAY!

To reduce slippage, follow these rules:

1. Trade liquid, high volume markets.

2. Avoid thinly traded stocks.

3. Go long order short when the market is quiet (following the DTA 30-minute opening rule).

4. Use limit orders to buy or sell at specified prices.

5. Keep a record of prices at the time you place your order.

Happy trading!

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