Introduction
In the last blog, we walked through what slippage is and how it existed back in the day. In the electronic trading world of today, slippage exist, though in a different form than before. Time is no longer lost in the chaotic bustle of shouting and negotiating prices on the floor. However, slippage persists in diverse forms, stemming from a multitude of factors. This elusive phenomenon, influenced by market volatility, liquidity, and various conditions, materialises as the unforeseen gap between a trader's anticipation and reality.
Exploring the Key Factors that Affect Slippage
Market Volatility:
- Rapid price movements at any given point in time, disrupt initial expectations, turning order execution into a daunting task.
Order Size Impact:
- In less liquid assets, sizable orders can sway the market, causing slippage as it adjusts to sudden demand or supply changes.
Lack of Liquidity:
- Illiquid markets hinder efficient order matching, leaving traders unable to execute orders at intended prices.
Time Delays in Electronic Trading:
- The electronic age introduces a slight delay between order submission and execution, leading to potential slippage.
Gaps in Trading:
- Market openings at significantly different prices create gaps, potentially causing substantial slippage for traders with standing orders.
Decoding Slippage Outcomes: Positive and Negative Scenarios
Slippage unfolds in two forms: positive and negative. Positive slippage occurs when a trade is executed at a more favorable price, amplifying the trader's benefit. Conversely, negative slippage happens when the trade is executed at a less favorable price, resulting in losses or diminished profits.
Managing Slippage better
While it can be restricting in it’s own way, the obvious choice to avoid slippage is opting for limit orders over market orders, utilizing stop-limit orders, and choosing to trade during periods of higher liquidity. An in-depth understanding of specific market conditions becomes paramount for traders to develop the foresight needed to manage these scenarios and mitigate potential slippage risks.
Largely a solved problem
That said, in today's trading world, slippage isn’t as big a head-scratcher as it used to be. The Indian trading landscape has evolved, and exchanges have constantly enhanced their infrastructure and operations. Technology has paved the way for faster order processing, and traders now navigate the markets with greater efficiency. Slippage, while not off the hook, has certainly become a more manageable facet of our daily trading lives.
The bigger problem that continues to gulp your hard-earned profit
But in no way does that end our worries. As we wrap up our discussion on slippage, there's another issue staring at you, that deserves your attention. It's a massive problem, and just like slippage, it affects your trades, eats away your profits and amplifies your losses. But here's the catch – it's not an infrequent occurrence; but a ghost that you live with, each day you trade. And what’s worse? You’ve learnt to live with it.
Yes, I'm talking about 'Human Slippage.' What is it, how does it quietly erode your profits and deepen your losses, and what can you do about it? I will cover all of this and more in our next blog post. Stay tuned. :)
