Concept
Slippage
Slippage is the difference between the price you expected and the price you actually received. It arises because the book moves between the moment an order is sent and the moment it fills.
How to read it
- It occurs in both directions, though adverse slippage is noticed more. Orders occasionally fill better than expected.
- It is largest where liquidity is thin, spreads are wide, or price is moving quickly — around news, at the open, and near expiry.
- It is separate from brokerage and taxes. Those are known in advance; slippage is not.
Why it matters more than it looks
A strategy takes 8 trades a day and averages 12 points of profit per trade. Slippage of 1.5 points on entry and 1.5 on exit removes 3 points per round trip — a quarter of the gross edge, before brokerage or taxes. On paper the method makes 96 points a day; in practice it makes 72 before costs. Nothing about the strategy changed. This is why an approach can test well and behave differently once live, and why recording expected versus actual fill price is one of the more useful things a journal can hold.
What it does not tell you
- It cannot be eliminated, only reduced — by using limit orders where a missed fill is acceptable, and by avoiding illiquid instruments.
- Backtests that assume fills at the closing price ignore it entirely, which systematically overstates results, particularly for higher-frequency approaches.
- It scales with order size relative to available depth. A size that fills cleanly in one instrument moves the book noticeably in another.
Frequently asked questions
What causes slippage?
The order book changes between an order being sent and filled. Thin liquidity, wide spreads and fast movement all increase how far the available price can move in that interval.
How do I reduce slippage?
Limit orders remove adverse price slippage at the cost of possibly not filling. Trading more liquid instruments and avoiding the most volatile moments also reduces it. It cannot be removed entirely from market orders.
Is slippage the same as spread?
No. The spread is the standing gap between bid and ask. Slippage is the difference between the price you expected and what you received, which can exceed the spread when price moves during execution.
Does slippage affect backtest results?
Yes, substantially. A backtest assuming fills at the close ignores it and overstates performance, and the effect grows with trade frequency.
Related
- Order Types: Market, Limit, SL and SL-M — Concept
- Liquidity and the Bid-Ask Spread — Concept
- Risk-Reward Ratio — Strategy
Educational use only
This page is educational material about how a technical tool is calculated and read. It is not investment advice, not a recommendation to buy or sell anything, and not a signal service. No indicator predicts future prices. CernoQuant is a trading journal and analytics platform, not a SEBI-registered investment adviser. Trading decisions and their outcomes are yours alone.
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