Understand Slippage in Trading: Risks and Protection Strategies

Slippage is a reality that every trader faces when operating in financial markets. It is the difference between the price you expect to pay (or receive) and the actual price at which your order is executed. This divergence often occurs, especially when markets move quickly or when there is low volume availability at the desired price level. Understanding how slippage manifests is essential to protect your results.

When and Why Slippage Happens

Slippage results from several factors you need to recognize. Delays in order transmission and processing, sudden price fluctuations, and insufficient liquidity at the execution point are the main causes. In MetaTrader 5 (MT5), for example, limit, stop, and market orders operate in specific ways: after being triggered, the system converts them into market orders for execution, leaving them exposed to slippage.

Market volatility is an amplifying factor. When large price movements occur within seconds, your order may be executed far from the initial price you observed on the screen. This is particularly critical during economic announcements or sudden liquidity withdrawals.

Slippage in Different Types of Orders on MT5

You may encounter slippage in different ways depending on the type of order you use:

Limit Orders

When using a limit order, you set an acceptable maximum (for buys) or minimum (for sells) price. However, when this level is triggered, MT5 executes it as a market order. If demand for that asset increases at the moment of execution, the best available price may be above your original limit.

Practical example: You place a buy limit order on EURJPY at $90.000. When the price hits this level, multiple buy orders are waiting to be filled. The best available price becomes $90.050, resulting in a slippage of $50.

Stop Orders

A stop order converts into a market order once the specified price is reached. In rapidly moving markets, this conversion can result in execution far from your trigger price.

Practical example: You set a stop-sell order for gold (XAUUSD) at $2,600 as protection. A sharp decline occurs, and with limited liquidity at that level, your order is executed at $2,595, resulting in a slippage of $5.

Market Orders

Market orders are executed immediately at the best available price at the moment. However, between the time you send the order and when it is processed, the market can move significantly.

Practical example: You send a market buy order for NAS100 (Nasdaq 100) observing the price at 21,200. When executed, the price is already at 21,205, generating a slippage of $5.

How to Reduce the Impact of Slippage on Your Trades

There are practical actions you can take to minimize slippage:

• Choose periods of high liquidity: Trade during times when trading volume is highest. More liquid markets offer better fills and smaller differences between requested and executed prices.

• Avoid major announcements: Significant economic releases, central bank decisions, or corporate disclosures cause extreme volatility. Wait for normalization before placing market orders.

• Consider your position size: Very large orders in illiquid assets tend to suffer greater slippage. Break large trades into smaller parcels.

• Monitor volatility: When the market exhibits wide swings, increase your slippage tolerance or wait for more stable conditions.

Slippage cannot be completely eliminated, but conscious management turns it from an unknown risk into a predictable operational cost. By understanding how slippage works with different order types, you make more informed decisions and better protect your capital.