Have you ever placed a trade…
Only to have the order filled at a price you didn’t want?
Whether price went up or down — in your favor or against it — this can be a frustrating experience.
It’s a phenomenon known as slippage…
And it can really throw a wrench in your trading if you’re not aware of it.
The good news, though, is that there are steps you can take to help prevent slippage from sabotaging your trading.
Now slippage is defined as the difference between the expected price of a trade and the price at which the trade is actually executed.
It’s possible for slippage to occur in your favor.
… But typically, when traders talk about slippage, we’re talking about price moving against us.
So what causes slippage to occur in the first place?
Well, you have to consider the fact that when you execute a trade order from your computer, it doesn’t get filled instantaneously.
There is always some amount of lag time between you placing your order…
And the order getting filled.
That means slippage is always a possibility when you’re using a market order…
Especially if volatility is high.
However, as I mentioned, there are some things we can do to help prevent slippage.
For instance, instead of using a market order, you can use a limit order to ensure you only get filled at the price you want.
Of course, there is a trade-off to using a limit order instead of a market order.
See, a market order will get filled as soon as possible, at the best possible price.
With a limit order, though, your trade will only get executed if the price reaches your specified order price…
Which means there’s a possibility that your trade order never gets filled at all.
Now, the reality is that there’s no real way to prevent slippage from ever occurring, apart from only using limit orders.
But that’s just not feasible for a lot of traders.
So, the reality is that you need to do everything you can to prepare for slippage…
And to minimize its impact on your trading.
The best way to do that is by ensuring that you have the right hardware in place to process the incredible amounts of market data being fed to your computer…
And to handle the massive memory and processing demands of your trade charting and analysis software.
Now, in the next Hawkeye newsletter we’ll dive deeper into the basic computing requirements most traders will need to ensure smooth trading with minimal slippage.