Slippage – What to Expect, When, and Why It Happens?

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One of the most cyclical and controversial topics in the Funded trading prop firm market is the topic of slippage.

What is Slippage in Trading and why it happens?

Slippage is a naturally occurring phenomenon (supposed to be at least) in the market that happens for numerous reasons, the most obvious reasons being the speed of the market and market depth.
Slippage occurs because the price requested is no longer available or not available for the volume requested. The price that is received will differ from the price requested usually in a negative way how positive slippage is a possible occurrence however is not as frequent as negative slippage as it generally requires a gap in market prices to occur.

When slippage occurs, it will feel like you are getting a price that is not visible to you in the market. This is because the price that is visible in all charting tools and price feeders is the top of the book price, which usually holds the least liquidity.

Prop Firm traders are generally prone to slippage more regularly than retail account traders due to the size of the orders being executed which can sometimes be 20-50 times larger than what a trader would trade on their capital.

For future reference and acknowledgment, the Funded Engineer operates on a volume-weighted execution policy based on order book depth for execution-based slippage. The order book depth is simulated based on market best practices.

When is slippage most likely to happen?

There are various moments in the market cycle where slippage is more likely to happen. They are:

  • During Asian markets and before European markets
  • Before, during, and after news announcements
  • During surprise speeches/comments from geopolitical figures
  • During a surprise world event such as war or natural disaster

Slippage during these times is purely due to the time of day, a scheduled event, or a surprise event.

The hardest to predict slippage in spot/OTC FX and CFD markets is when it is based on market depth when no news or geopolitical events occur.

Market depth slippage is the slippage where the average retail trader tends to “get it wrong”. A trader tends to increase their position size without considering the ramifications of doing so.

For example, if you have 20 lots of XAU/USD open, it should be expected that an order executed as a stop order, which is a market order, will slip. Stop orders in OTC markets are generally just triggers for a market order. So, when a stop loss or pending stop is hit, it converts immediately to execute at market order. This generally means that in an order queue, it is the last in the queue at the time of request and is most prone to slippage.

 Slippage during periods without news is more likely to occur during the Asian session before the European markets open.

Is there a way to avoid slippage in Trading?

There is no way to specifically control slippage. However, there are some “best practices” you can deploy to prevent slippage from taking control of your account.

  • Don’t trade minutes before, during, and minutes after news announcements
  • Pay close attention to global news
  • Lower your position size
  • If you plan to have a large position size, cut that position into smaller parts for the best average price
  • Understand the session you are trading and the market depth available at the time

For reference, here is a screen capture of the market depth on the Purple Trading Metatrader 5 platform of Funded engineer for EURUSD during the Europe and London sessions.

screen capture of the market depth on the Purple Trading Metatrader 5 platform of Funded engineer for EURUSD during the Europe and London sessions

As you can see, if you were to execute 1 lot, you would receive the price you requested. After that, there are 16 lots and 5 lots respectively available depending on which side of the market you are on. When you open your position, if your position is larger than the initial level on the ladder, you should expect to slip until the price that can fill your actual order. These are the basic functions of market depth-based slippage.

Nefarious slippage – it exists but is rarer than you think

The general environment – especially on social media – is to ignore the positives and focus solely on the negatives. When someone is winning, we clap once and move forward. When someone loses and claims it slippage, we immediately grab our pitchforks and join the crowd screaming how this is scandalous, how could you, why would you, it must be a scam.

Nefarious slippage exists but it’s rarer than you think. The backlash that forms when you generate slippage that is beyond the natural depth of the market is a business killer. Reputations are lost easily due to nefarious slippage and so it is far less common than people believe.

What is more common is the misunderstanding that when you trade 1 lot and when you trade 100 lots is completely different. Funded trading programs are a huge opportunity for traders who are short on capital to build their capital legitimately. Whether you are trading 100 lots with a prop firm or 100 lots with a broker, you should expect slippage. It’s the reality of a financial market.

People should look at prop firm trading evaluations as opportunities to learn what it is like to trade larger click sizes with real market conditions because when they upgrade their personal account to prop size, they will experience the same type of conditions. When slippage happens, most of the time it’s not someone scamming you but rather the market dynamic at the time. Controlling slippage on an individual trader at an individual moment is impractical.

We have no doubt that there are some bad actors out there generating slippage beyond the order book, some of them may even be large companies but they are few and far between and it is important for traders looking to take advantage of the opportunity to work with a company who isn’t.

Funded Engineer accounts are all virtual funded accounts and no live funds are traded. We simulate the order book with best top-of-book practices and execute virtual trades on a volume-weight basis (VWAP). We cannot guarantee that conditions in a real live account will be the same as our execution as our execution does not take into account any execution queue or execution latency that would occur if a real order went directly to a real liquidity provider.

The above information is for information purposes and may not reflect the same result with providers outside of the funded engineer environment.

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The Funded Engineer Team.