Slippage
Slippage
Discover the term "Slippage", one of the most crucial concepts in trading. Slippage is a crucial element of understanding for both new and seasoned traders. Slippage can impact your trading outcome, so it's important to know what it is and how it works.
The Basics of Slippage
Let's start with an essential question: What is Slippage? Slippage occurs when the execution price for trade is different than the price you anticipated. This could be during buying or selling a security or a trading instrument.
Why Slippage Occurs
Before we delve further into the concept of slippage, let's understand why slippage happens. Slippage can occur due to several reasons. Most commonly, slippage happens when the market becomes volatile and prices rapidly change. In this case, the price at which you plan to execute a trade can slip away before the execution takes place.
Impact of Slippage on Trading
So, how does Slippage impact your trading? The influence of slippage on trading comes down to the type of trading strategy you're using. If you're a scalper or day trader, your trades are typically affected by even tiny slippage, as your profit margins are often tight. Long-term traders or investors may not be as impacted, as they do not depend on small price fluctuations.
The Pros and Cons of Slippage
While slippage may sound entirely negative, it's not always so. Slippage can sometimes be beneficial. "Positive slippage" occurs when your execution price is better than you anticipated. However, the typically experienced slippage is negative. So in most cases, you'll want to aim to reduce slippage in your trading activity.
How to Deal with Slippage
To combat slippage, it's often wise to use limit orders instead of market orders. Limit orders allow you to set a maximum price for your purchase or a minimum price for your sale. Also, trade in higher-volume markets where the chances of price changes between order placement and execution are low.
Understanding and managing Slippage is an integral part of a successful trading strategy. The more you know about it, the better your potential outcomes in trading.
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