Why slippage is a killer of trading strategies

Slippage is a common problem faced by traders, and it can have a significant impact on the performance of trading strategies. In this blog post, we will discuss what slippage is, how it affects trading strategies, and what traders can do to minimize its impact.

Slippage occurs when a trader places an order to buy or sell an asset at a certain price, but the order is executed at a different price. This can happen for a variety of reasons, including market volatility, lack of liquidity, and delays in order execution.

Example 1

One of the main ways in which slippage can affect trading strategies is by reducing the potential profits of the trade. For example, if a trader places an order to buy an asset at $100, but the order is executed at $101 due to slippage, the trader will have to pay an extra dollar for the asset. This can quickly add up and significantly reduce the potential profits of the trade.

Example 2

Another way in which slippage can affect trading strategies is by increasing the risk of losses. For example, if a trader places an order to sell an asset at $100, but the order is executed at $99 due to slippage, the trader will have to sell the asset at a lower price, which can result in a loss.

Possible solution

To minimize the impact of slippage on trading strategies, traders can take several steps. One of the most effective ways is to trade during periods of low volatility, when there is less likelihood of large price movements. Traders can also use limit orders instead of market orders, which allows them to set a specific price at which they want to buy or sell an asset. This can help to reduce the impact of slippage by ensuring that the order is executed at the desired price.

In conclusion, slippage is a common problem faced by traders and it can have a significant impact on the performance of trading strategies. By understanding what slippage is and how it affects trading strategies, traders can take steps to minimize its impact and improve the performance of their trades.

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