What is slippage and how can you avoid it?

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If you are concerned that you are getting excessive slippage on your stop orders placed with your forex, CFD or spread betting broker, it may actually be your own fault.

The first thing to understand is that not all stops are the same.  There are many different types that all fulfill specific executions based on a traders particular strategy.

The three main types of stop in trading are:

  • market
  • limit
  • guaranteed

Here is a quick breakdown of how those stop types work and the potential problems that are associated with them.

Market Stop (some slippage)

This is the most popular form of stop in CFD trading and spread betting and the one that generally causes the most complaints.  A market stop is activated when a price is touched to generate an order. So for example, if you are long the FTSE and have a stop to sell £10 pp in the FTSE @ 7210.  When the spread betting brokers quote reach 7209/7211 a sell market order will be entered.  If the price doesn’t move then you get filled at your price, but if it trades lower there will be slippage and you will be filled lower because it is a market order.  Even worse though, if the price gaps down to 7150 because of a bad economic figure release you stop could be filled at 7150 or even worse, even if the price jumps back up again after.  The key point here is that the normal stop order is a market stop and there is no guarantee on the price.

Limit Stop (potentially no fill)

Limit stops can help resolve the problem of slippage because instead of a market order being placed.  When the stop price is touched a limit order is placed.  So, using the same example, if you have a stop limit to sell £10 pp in the FTSE at 7210 and the price gaps to 7150 you will not be filled.  Instead, you will be working a limit at 7150 even if the price is all the way down at 7100.  So the advantage of the limit stop is that you don’t get any slippage because you are only filled at your price or better, but you could end up seriously offside if the market continues to move against you.

Guaranteed stop (no slippage)

Finally, spread betting brokers like IG, City Index, Spreadex & City Index also offer guaranteed stops.

Because CFD trading and spread betting is OTC (they make up their own prices and you are not trading on exchange) they can offer to guarantee your stop price.

It is exactly what is says it is, no slippage, no not getting filled and would seem to be the most sensible option.  There is, of course, a premium to pay and they are only really for small trades as it’s not economically viable for brokers to lose money on filling big orders and taking a loss.

One other thing to remember with stops is that technology is not infallible.  If you get a bit of slippage (like fat fingers) it’s all part of the markets.  Good spread betting brokers generally want their clients to make money to maintain a long-lasting and profitable relationship (for both parties).

So if you get a bad fill, give your broker a call, they’ll usually bend over backward to keep good clients happy.  If they don’t then just switch to another broker.  There are plenty out there and the ones that deserve the best business are the ones that look after their customers the most.

Read next: Guaranteed stop losses: What are they and which CFD and spread betting brokers offer them?

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