Slippage
Slippage is the difference between the price you expected for a trade and the price you actually got. On a buy it is usually measured from the best ask when the order arrived, on a sell from the best bid. Market and stop orders on thin, fast small caps slip the most, because the size you want may not be at the price you see.
Why it matters to a small-cap momentum trader
On a low-float runner the book is thin: a few hundred shares at the ask, a few hundred more a cent or five higher. A market order for 3,000 shares can sweep several prices, and the average fill ends up well above the quote you clicked on. The same happens on the way out, when a stop turns into a market order in a falling stock. Slippage can turn a trade that planned to make as much as it risked into a loser, so small-cap traders size to the book, not only to the stop.
How it is measured
The reference. The best price on the side you are crossing when the order arrives: the best ask for a buy, the best bid for a sell.
Per share. For a buy, fill price − reference. For a sell, reference − fill price. A positive number is a cost; a negative one is price improvement.
In dollars. Slippage per share × shares filled at that price, added up over every fill.
Some traders measure from the last trade or from the price on the chart when they decided instead. Those numbers also include the spread and their own reaction time, so they come out larger. Whatever you use, use the same reference every time.
Where slippage comes from
- Size larger than the book. An order bigger than the size at the best price walks up to the next prices.
- Speed. In the time between your click and the fill the quote can move, most of all on news.
- Stops. A stop-market order becomes a market order when it triggers, often in a fast move against you.
- Gaps. After a halt or overnight the stock opens past your price, and the order fills at the open.
Slippage in Hindsight Markets
A market or marketable order takes the size that was really displayed across the exchanges, best price first, and if the size is not there you get a partial fill. The journal records every fill with its slippage against the best bid or ask when the order arrived, and adds them up for the trade.
A worked example: a market order through a thin book
An illustration with made-up numbers, not a real stock or a real day.
The book. The best ask is 3.10 for 800 shares. Behind it: 600 at 3.12, 1,000 at 3.15 and 2,000 at 3.20.
The order. A market buy for 2,000 shares fills 800 at 3.10, 600 at 3.12 and 600 at 3.15.
The average. (800 × 3.10 + 600 × 3.12 + 600 × 3.15) ÷ 2,000 = (2,480 + 1,872 + 1,890) ÷ 2,000 = 6,242 ÷ 2,000 = 3.121.
The slippage. 3.121 − 3.10 = 0.021 a share, or 2,000 × 0.021 = 42 dollars, before the stock has moved. With a stop 0.15 under the expected price, the real risk to that stop is 0.171 a share, 14% more than planned.
Common mistakes small-cap traders make with slippage
- Sizing from the stop alone. The book decides how much you can buy near the price. Look at the size at each level before you size.
- Using market orders in the pre-market. Most brokers take only limit orders outside regular hours, and the thin book would slip a market order badly anyway.
- Leaving out slippage when judging a strategy. A setup that pays on the chart can lose once a few cents per share in and out are counted.
- Panicking into the bid. Dumping a full position with a market order in a fast drop walks the bids down. A marketable limit a few cents under the bid sets a floor on the price.
Common questions
- What is slippage in trading?
- The difference between the price you expected and the price you were filled at. It usually comes from orders larger than the size at the best price, or from the price moving between your order and the fill.
- How do you avoid slippage?
- Use limit or marketable limit orders, size to the shares on the book, avoid trading the fastest seconds of news, and be careful in thin pre-market and after-hours books. You cannot avoid it entirely on market and stop orders.
- Is slippage always bad?
- No. Sometimes the price moves in your favour before the fill, which is positive slippage or price improvement. On fast small caps, though, slippage is much more often a cost.
- What is slippage tolerance?
- A setting on some platforms that caps how far from the expected price a trade may fill. In stock trading the same idea is a marketable limit: a buy limit a few cents above the ask that fills only up to that price.
- Why does my stop loss fill below my stop price?
- A stop-market order becomes a market order when a trade prints at or through the stop, and then fills at the best prices left. In a fast drop or after a gap those can be well below the stop.
How to practise it in Hindsight Markets
- Open a past trading day and pull up a low-float mover on Level 2.
- Read the size at the best ask and the next few prices before you choose a share count.
- Take one trade with a market order and one with a marketable limit a few cents over the ask.
- Open each in the journal: every fill shows its slippage, and the Slip column adds it up for the trade.
- Compare the slippage with your stop distance and adjust your size for that stock.
Practice this on a real past day in Hindsight Markets
Trade a real past day against the book that was there, and let the journal show what each fill cost you against the quote.