What Is Slippage and Why It Happens

Slippage is one of those trading concepts that sounds technical but feels painfully real once it hits your P&L! You click Buy or Sell expecting one price. The order gets filled at another. The difference may be small sometimes just a fraction of a pip but over dozens or hundreds of trades, it adds up. For active traders, and especially for prop traders working with tight risk rules, slippage can quietly turn a solid strategy into an underperformer.

Yet slippage is often misunderstood. Many beginners think it’s a broker trick or a sign of bad execution. More experienced traders know it’s unavoidable but not always uncontrollable.

This article explains what slippage is, why it happens, when it’s most likely to occur, and how traders particularly prop traders can manage and reduce its impact. Whether you trade forex, futures, stocks, or crypto, understanding slippage is essential to realistic performance and long-term consistency.

What Is Slippage in Trading?

Slippage is the difference between the expected price of a trade and the actual price at which the trade is executed.

If you place a market order to buy EUR/USD at 1.1000, but the order is filled at 1.1003, the 0.3-pip difference is slippage. The same concept applies across all asset classes.

Slippage can be:

• Negative, when execution is worse than expected
• Positive, when execution is better than expected

While traders usually complain about negative slippage, positive slippage does exist especially in fast or highly liquid markets. Still, over time, most active strategies experience slippage as a cost, not a benefit.

Slippage is not a fee. It’s not a commission. And it’s not necessarily manipulation. It’s a natural result of how modern markets work.

Why Slippage Happens

Slippage occurs because markets are dynamic, not static. Prices move continuously, and orders are filled based on available liquidity, not on what a trader sees on their screen.

Several factors contribute to slippage, often simultaneously.

Market Liquidity and Order Flow

Liquidity is the most important driver of slippage.

In highly liquid markets such as major forex pairs during London or New York sessions there are many buyers and sellers at each price level. Orders can usually be filled close to the quoted price.

In low-liquidity environments, there may be fewer counterparties willing to trade at your desired price. When that happens, your order “walks the book” and gets filled at the next available price or several prices worse.

This is why slippage is more common in:

• Exotic or thinly traded instruments
• Small-cap stocks
• Crypto pairs with low volume
• Off-hours trading sessions

For prop traders, liquidity matters even more. Many prop strategies involve larger position sizes, which require deeper liquidity to execute efficiently.

Market Volatility and Price Speed

Volatility increases slippage because prices change faster than orders can be matched.

During calm conditions, the bid and ask move slowly. During volatile moments such as news releases or market opens prices can jump multiple ticks in milliseconds.

By the time your market order reaches the exchange or liquidity provider, the price you saw may no longer exist.

High-volatility environments include:

• Economic news releases (NFP, CPI, FOMC)
• Earnings announcements
• Market opens and closes
• Sudden geopolitical events

This is why many experienced traders avoid placing market orders during major news unless volatility is part of their strategy.

Order Type and Execution Method

The type of order you use has a direct impact on slippage.

Market orders are the most susceptible. They prioritize execution over price, meaning the trade will fill at the best available price whatever that may be.

Limit orders reduce or eliminate slippage by specifying a maximum (or minimum) acceptable price. However, they introduce a different risk: the order may not be filled at all.

For example, a limit buy order at 1.1000 guarantees no negative slippage, but in fast markets, price may move away before the order executes.

Prop traders often face a trade-off here. Using limits improves execution quality but may reduce fill rates especially for short-term strategies.

Latency and Technology Factors

Slippage is also influenced by execution speed.

Latency the delay between sending an order and having it executed can come from:

• Slow internet connections
• Trading platform delays
• Broker routing inefficiencies
• Distance between trader and exchange servers

In high-frequency or scalping strategies, even milliseconds matter. A small delay can mean the difference between a clean fill and noticeable slippage.

This is why many professional and prop traders invest in better infrastructure, including VPS hosting and low-latency platforms.

Broker and Market Structure

Different markets handle orders differently.

In centralized exchanges (like futures or stocks), orders are matched through a central order book. In decentralized or OTC markets (like spot forex), brokers route orders to liquidity providers.

Execution models such as STP, ECN, or market maker can affect how slippage is experienced, though no legitimate model can eliminate it entirely.

What matters most is transparency. Reputable brokers and prop firms disclose execution statistics and do not artificially skew slippage against traders.

Positive vs. Negative Slippage

Slippage is often discussed as a negative, but it’s technically neutral.

Positive slippage occurs when a trade is filled at a better price than expected. For example, a sell order executes higher than anticipated due to favorable price movement.

In efficient markets, positive and negative slippage can balance out over time. However, many strategie especially those using tight stops or scalping for small profits are more sensitive to negative slippage.

Understanding this asymmetry is crucial when evaluating strategy performance.

Slippage in Prop Trading: Why It Matters More

Slippage affects all traders, but it plays an outsized role in prop trading.

Prop firms impose:

• Strict daily and total drawdown limits
• Fixed risk parameters
• Profit targets that assume clean execution

Even small execution differences can push a trader over a drawdown limit or reduce expectancy enough to fail an evaluation.

For example, a strategy with a 1:1 risk-reward ratio may look viable in backtesting. Add consistent slippage, and the edge can disappear.

This is why professional prop traders factor slippage into:

• Backtests
• Forward testing
• Position sizing
• Strategy selection

Ignoring slippage is one of the fastest ways to misjudge real-world performance.

How Slippage Impacts Trading Performance

Slippage affects more than just individual trades.

Over time, it influences:

• Net profitability, by reducing average reward
• Win rate, especially for tight-stop strategies
• Risk metrics, by increasing actual loss size
• Psychology, by creating frustration and mistrust

Many traders blame their strategy when the real issue is execution quality.

Accounting for realistic slippage turns theoretical performance into actionable expectations.

How to Reduce Slippage (But Not Eliminate It)

Slippage cannot be fully avoided, but it can be managed.

One of the simplest steps is trading during high-liquidity sessions. For forex traders, this usually means London and New York overlaps. For futures and stocks, regular market hours offer the deepest liquidity.

Using limit orders instead of market orders can significantly reduce slippage, especially for entries. Some traders use market orders for exits only, where execution certainty matters more.

Avoiding trading during major news events is another effective filter. If volatility is not part of your edge, standing aside can protect both capital and mental clarity.

Improving technology and execution speed also helps. Stable internet, reliable platforms, and low-latency setups reduce avoidable delays.

Finally, realistic strategy design matters. Strategies that rely on capturing one or two ticks of profit are far more vulnerable to slippage than those targeting larger moves.

Slippage vs. Spread: Don’t Confuse the Two

Slippage and spread are related but distinct.

The spread is the difference between the bid and ask price. It’s a known, visible transaction cost.

Slippage is the difference between expected and executed price. It’s variable and context-dependent.

A trade can have a tight spread but still experience slippage in fast markets. Conversely, a wide spread does not automatically mean slippage will occur.

Professional traders account for both when calculating true trading costs.

Is Slippage a Sign of a Bad Broker?

Not necessarily.

Slippage is a natural outcome of real market conditions. In fact, the complete absence of slippage—especially during volatile periods can be a red flag, suggesting artificial price smoothing.

What matters is whether slippage is symmetrical and transparent. Reputable brokers and prop firms allow both positive and negative slippage and provide execution data.

Consistently one-sided slippage, unexplained re-quotes, or execution far outside market norms may indicate poor practices but occasional slippage alone is not evidence of wrongdoing.

Key Takeaways

Slippage is an unavoidable part of trading in live markets, not a mistake or a hidden fee. It happens because prices move, liquidity fluctuates, and orders take time to execute.

For prop traders, slippage matters even more due to strict risk rules and performance targets. Understanding when and why slippage occurs allows traders to design strategies that survive real-world conditions not just backtests.

You can’t eliminate slippage, but you can plan for it, reduce its impact, and stop it from quietly eroding your edge.

FAQ

What is slippage in simple terms?
Slippage is the difference between the price you expect to trade at and the price your order is actually filled at.

Is slippage always bad?
No. Slippage can be positive or negative, though traders tend to notice negative slippage more often.

Does slippage only happen with market orders?
Slippage mostly affects market orders, but limit orders can experience indirect slippage through missed fills.

Is slippage worse in prop trading?
It can be more impactful because prop trading uses strict drawdown limits and precise risk parameters.

Can slippage be completely avoided?
No. It can be reduced but never fully eliminated in real, moving markets.