Slippage Meaning Explained: How it Operates, Managing & Avoiding It

“Slippage” sounds a bit like something slippery, but what is it, really?

Well, slippage meaning has confused many. 

But simply put, it’s  like that sneaky surprise you get when you expect one thing, but something else happens.

Now, here’s where it gets interesting. Even though the term “slippage” lives mostly in the world of finance, it’s not solely used in the “slippage” club. 

As a matter of fact – a good place to start understanding slippage in the inner world of finance, would be to start understanding it in the outer world of management. 

First, let’s understand slippage in some management contexts, like “time slippage” and “effort slippage.” 

Time Slippage 

Time slippage is like when your day doesn’t go as planned. You thought you could finish your tasks by 5 PM, but it’s 8 PM, and you’re still at it. 

Effort Slippage 

Effort slippage is kind of the same but focuses on how much energy you put into something.

Let’s say you have a project where you planned to spend 100 hours on a task, but when you finish it, you realise it took 120 hours to complete. The effort slippage for this task would be:

Effort Slippage = 120 hours (Actual Effort) – 100 hours (Planned Effort) = 20 hours

(Effort slippage formula: Effort Slippage = Actual Effort – Planned Effort) 

Now that you’ve understood the workings of slippage in the outer world of management, it would be easier to understand slippage meaning in the inner world of finance. 

Slippage Meaning in Finance 

It’s a phenomenon that can happen at any time but is most prevalent during periods of higher market volatility when market orders are used. 

To put it simply, slippage occurs when the market conditions change between the time you request a trade and the time the exchange or market maker executes it.

So, what would it mean by a slippage of 1%? Let’s take a look. 

1% Slippage Meaning

A 1% slippage implies that an order can be executed at a price 1% more or less than the intended price. 

For instance, if you placed an order for a company’s shares at $100 and experienced a slippage of 1%, you might end up paying $101 per share, resulting in 1% negative slippage.
But how exactly does slippage work? 

Also Read: What is Forex Trading? Meaning, Importance, 4 Advantages, Brokers in India

How Slippage Operates

Slippage in the financial world happens when the actual price of a trade execution differs from the expected price. 

It’s like trying to buy a burger for $5, but by the time you get to the counter, the price has jumped to $6. 

In trading, this can occur due to market volatility or delays in order processing, potentially leading to unexpected costs or profit (click here to learn about profitability ratios in stock market). 

What sets slippage apart is that it doesn’t inherently carry a positive or negative connotation. 

Any deviation between your intended execution price and the actual execution price falls under the umbrella of slippage. 

When you execute an order, whether it’s buying or selling a security, it happens at the most favourable price available on the exchange or through a market maker. 

Now that you know slippage meaning, and how it works, let’s explore how you can mitigate this phenomenon. 

Also Read: How to Invest in Stock Market for Beginners: Your 7-Step Guide For a Head Start

Strategies to Mitigate Slippage

The most important bit about mitigating slippage starts here. How exactly should you avoid it? 

While slippage is an inherent aspect of trading, there are strategies to minimise its impact:

1. Trade in Calm Moments:

Slippage is more likely to occur in volatile markets or during low liquidity periods. 

To reduce the chance of slippage, consider trading during stable market conditions and avoid critical economic announcements or events that can lead to erratic price movements.

2. Use Limit Orders

Limit orders can help you avoid negative slippage. When you place a limit order, the trade will only execute at your specified price or better. 

However, keep in mind that there’s a possibility the order may not get executed if the market doesn’t reach your specified level.

3. Slippage Tolerance

Some platforms allow traders to specify a maximum slippage tolerance, such as 2%. 

This means that the order can be executed at a price within 2% of your intended execution price. It offers a degree of control over the potential slippage.

To sum it up, slippage is that unexpected twist in the world of finance, a bit like when your day doesn’t go as planned in management. 

It’s the difference between the intended and executed price of a trade, occurring often in volatile markets. 

Slippage doesn’t discriminate; it can be positive or negative. To mitigate it, trade wisely, use limit orders, and set slippage tolerance. Now, you’re equipped to navigate this slippery world of finance and management.