Slippage is the difference between the expected price of a trade and the price at which it actually executes. This gap may seem negligible on individual trades, but across hundreds of transactions, it can be the difference between a profitable strategy and a losing one.
Why Slippage Matters More Than You Think
Consider a strategy that produces a 0.3% average profit per trade before slippage. If average slippage is 0.15%, half your edge has evaporated before you even measure performance. Many strategies that look excellent in backtesting fail in live trading precisely because of this hidden cost.
Types of Slippage
Market impact slippage: The act of placing your order moves the market against you. The larger your order relative to available liquidity, the greater the impact.
Timing slippage: The delay between signal generation and order execution. Even milliseconds matter in fast-moving markets.
Spread slippage: The bid-ask spread represents a guaranteed cost on every round-trip trade. Wider spreads in illiquid instruments amplify this cost.
How to Minimize Slippage
Trade liquid instruments: Higher liquidity means tighter spreads and less market impact.
Use limit orders wisely: Limit orders eliminate spread slippage but introduce the risk of missed fills.
Size positions appropriately: Proper position sizing accounts for liquidity constraints.
Include realistic slippage estimates in backtests: Any backtest that doesn’t model slippage is misleading. Include conservative slippage estimates to avoid overfitting to unrealistic results.