A guide to gapping and slippage
Markets move on news When markets hear major news, and certainly news that was unexpected, it can promote a rapid rethink of its pricing and positioning.
mes when traders will often experience greater probability of slippage.
What is slippage and how does it happen?
Slippage is a consideration every trader should understand as it’s a risk nearly all traders will face at some point in their trading journey.
The term ‘slippage’ refers to the execution and resulting fill of a stop-loss order relative to that of the specified stop-loss level you might have attached to your open position.
An example of slippage
- John buys five contracts of EURUSD at 1.1055, attaching a stop-loss order at 1.1020.
- However, after a sudden spike lower in price after a strong US economic data point relative to market expectations, the stop is triggered and the order subsequently filled at 1.1018.
- John experiences two-pips of slippage.
Slippage when you open a position
Traders can also get slippage on market stop orders to open a position, with pricing moving through the specified level to open a trade and the trader getting a worse fill than what was desired on the deal ticket.
When does slippage happen?
Slippage can happen at any time when markets are open. Although many will be familiar with the phenomenon of a market ‘flash crash’, which are rare, there is usually a known catalyst to drive a sudden spike higher or lower in price. Traders need to manage this risk by monitoring their accounts and positions.
Three ways you can manage your risk
- Correct placement of stops relative to the instrument’s volatility and period range
- Stay in the know around potential high risk news events. Subscribe to the Daily Fix, follow us on Twitter or check out our high impact economic calendar.
- Know when to hold and when to fold before an event risk or weekend.
* All charts sourced from Bloomberg. Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information provided here, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.