CFD slippage is a term you may or may not be familiar with. If you’ve traded CFDs, you’ve almost certainly experienced it, even if you didn’t know exactly what it was at the time. So, what exactly is CFD slippage? Essentially, it’s the price gap between where you thought your order would be filled and where it actually got filled.
In this article, we’ll discuss in more detail what CFD slippage is, why it happens and what you can do to reduce its impact.
What Is CFD Slippage and Why Does It Matter?
Picture a real-life trading scenario. You see the price of a particular asset you want to trade, and decide you want to enter a position. Then, you submit your order and get filled. But you don’t get filled at the price you wanted, which was just a few seconds earlier. This is CFD slippage in action.
But why does this actually happen?
Generally, slippage occurs because market conditions never remain stagnant. They’re always moving in a direction – whether that be up or down. So, in theory, there can be negative and positive slippage. Positive slippage is when your trade is filled at a more favorable price. Negative slippage is the opposite – where your trade is filled at a less favorable price.
Most people only really notice negative slippage because it’s the one that costs them money. But both positive and negative slippage do exist.
Understanding Negative Slippage in CFD Trading
First, let’s discuss negative slippage, since it’s the one that hurts traders and affects your profit and loss directly.
When you submit a market order, you’re basically saying: “I want to trade or buy this asset at the current available price". Now, the execution price may not be the same as what you saw when you decided to take the trade. It could be a little worse, or sometimes quite a bit worse.
Negative slippage can impact both buy and sell orders. Here’s how it normally plays out:
Buy orders: You get filled at a higher price than you hoped. For example, you want to enter a long trade at $75, but you end up getting filled at $75.50.
Sell orders: You get less for your sale than you expected. For example, you want to sell out of a trade and expect to get filled at $42, but get filled at $41.
These are real examples of CFD slippage in action.
These might seem like relatively small differences, but they add up, especially if you’re doing multiple trades each day. These small bits of slippage can add up over days, weeks and months.
The most unforgiving markets for slippage are low liquidity and highly volatile markets. In low liquidity markets, there are fewer participants, so your orders get filled with whoever is available, and at whatever price is available. So, this often means more slippage. The same principle applies when trading other less-common assets like small-cap stocks or exotic currency pairs. Fewer market participants means orders may be filled at less favorable prices.
Market volatility is another thing that can cause bad slippage. High volatility results in rapid price movements, making clean trade execution more difficult. Price can move sharply and quickly, and your orders can get filled quite far away from the price you intend to enter a trade. The most challenging markets to navigate when it comes to CFD slippage are highly volatile ones, with few market participants.
Positive Slippage: The Unexpected Upside
As mentioned earlier, positive slippage is something that can – and does happen. it’s just not noticed as easily since it doesn’t put a dent in your profits.
It happens when the market moves in your favor between the time that you place your order and the time your order fills. So, if you want to fill a long position at $35, but your trade gets executed at $34.80, that’s an example of positive slippage.
What Causes Slippage in Trading?
Now that we understand what slippage in trading is, what exactly causes it? Here are the primary reasons slippage exists.
Market volatility
Market volatility is one of the big drivers behind CFD slippage. Highly volatile markets result in lots of sudden, sharp price swings, where prices jump all over. So, a few seconds, or even milliseconds, can see prices move, resulting in slippage in your trades. This is especially prevalent during major news events where slippage is almost guaranteed.
Market liquidity
Market liquidity is another big factor. In highly liquid markets, there’s lots of buyers and sellers so your order usually gets filled fast – and close to your expected price. But in low liquidity markets, it’s the opposite. There are fewer buyers and wider bid and ask spreads. So, you’re not likely to get filled that close to your expected price.
In the forex market, for example, you’ll find the most liquidity during the busiest trading sessions, like when London and New York overlap. Likewise, when you trade the more commonly traded currency pairs like EUR/USD, it’s easier to get good fills. But try trading exotic currency pairs when the market is quiet, and you’ll struggle to get filled at the price you want.
The size of your order matters too. It will be easier to get a good fill with a smaller order size. But if you’re placing larger orders – especially when liquidity is thin, you’ll struggle to get filled at your expected price.
Market Orders vs. Limit Orders: Which Minimizes Slippage?
This is where we get into the nuts and bolts of how to work around slippage. The first step is understanding market orders, limit orders and how they each work when it comes to getting your orders filled.
Market orders
When you place a market order, you’re saying to the market, “Fill this order as soon as possible at the best available market price”. In this scenario, your order will get filled quickly, but it could be higher or lower than you hope. When you place a market order, you’re asking your broker to prioritize quick execution over precise execution. The broker will fill your order at the current market price.
Limit orders
Another type of order is a limit order. When you use a limit order instead of a market order, you specify where exactly you want your order to be filled. In this scenario, you’re telling the market, “Only fill my order at this price”. This is more suitable if you’re happy to wait and aren’t in a rush to enter the market. The downside is that your order may not get filled at all – depending what the market does.
If your main goal is to avoid slippage and get a favourable price, you’ll want to use a limit order. Just be aware of the possible con (no order fill at all). But this is ideal if you want to be more precise about calculating your profit and loss potential before you enter a trade.
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Strategies to Avoid or Reduce Slippage
Let’s get more practical now and discuss real-world strategies and tips you can use to reduce slippage. Here’s what you can practically do.
Use limit orders
By placing limit orders, you’re avoiding slippage in the sense that you are specifying where you want your order to be filled. As mentioned earlier, the downside is that you might wait to get your order filled. Worst case, your order won’t get filled at all if the price you want has not been reached.
Trade during high liquidity periods
More liquidity means more buyers and sellers, so easier order fills. Not only does this mean orders should be filled easier, it also means orders will likely be filled at better prices. If you’re looking to minimize slippage, more market participants is better.
Avoid trading around news events
There’s usually a lot of volatility and price movement around major news events. If you’re looking to minimize slippage, it’s a good idea to avoid trading around news releases. Sudden price gaps can be common as market participants digest the news, and this can result in you struggling to get a good fill on your order.
Reduce order size
Another practical thing you can do is reduce your order size. If you put through a large order and there isn’t enough liquidity to fill you at your desired price, you may get filled at multiple price levels. Smaller orders are more likely to get filled at your desired price.
Choose your instruments carefully
The CFDs you trade can make a massive difference in reducing slippage. It’s advisable to stick to common instruments where there is more liquidity and market participants. Common forex pairs, index ETFs and large cap stock will be better for reduced slippage rather than small-cap stocks and exotic currency pairs, for example.
Choose a reliable broker
Lastly, you’ll want to choose a reliable broker with fast, good execution on trades. The last thing you want is to tick all the right boxes to reduce slippage, only to be let down by your broker. Seacrest Markets has up to a 99.9% fill rate on all orders, which is what you want.
Balancing Execution Speed and Quality
Slippage should be seen as something that's part and parcel of trading the financial markets. Rather than seeing it in a negative light, understand why it happens and put measures in place to minimize it.
The good news is that there are some simple things you can do right away to reduce the impact of slippage in CFD trading.
Stick to liquid instruments, using limit orders where possible and time your trading around periods of high liquidity. If you do these basic things, you're already well on your way to reducing slippage costs and improving your trading outcomes.
