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domingo, 24 de abril de 2016

What is slippage in stocks day trading?

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slippage in trading

In an ideal world, when a daytrader place an order, the trade is executed at exactly the price specified. However, under certain conditions, the trade or operation can be executed at a different price. For example, if an intraday trader places a stop loss after having taken a long position - in other words, a trade in which he or she bought stocks instead of selling them - it is possible that the share price could fall below the price specified in the stop loss order before it can be executed. In this case, the stop order will be executed at a lower price - although the broker will try to get the best price available.

What is the cause of the slippage?

Slippage occurs in both the stock market and other markets, such as futures markets and currency markets. The main reason for this is the high volatility - as the price moves quickly in one direction or another, it is possible that there isn´t any buyer or seller at the specified price. This can be caused by strong technical factors - such as when a stock is being subjected to severe overbought - or unexpected news.

Clearly, for intraday traders, the slippage can cause significant problems with the transactions, especially when applied to stop losses - traders end up risking more on individual trades than they had anticipated, which may lead to bigger losses than expected. At the same time, it is obvious that although traders want their stop loss orders being executed, they could end up losing even more if the transaction is not executed at the next best price.

How can  day traders  protect themselves from slippage?

A key thing to avoid is the stock trading in which an important news is imminent. It is evident that most market news are scheduled before the market opening or after the closing of the same, so the day traders have the opportunity to avoid this type of event. However, if a press event is scheduled to occur during the trading day, then the stocks that may be affected by such an event should be avoided. This not only refers to news on the share itself - for example, if a major economic announcement in Europe in late trading day could affect an American stock during the day, is not a good idea to have an open position in this stock.

Another thing intraday traders must avoid - and this is the essence of intraday trading - is to have open positions at the end of the day. There is always a significant risk that the market gap extends higher or lower when the market opens the next time, and this can lead to large slippage - and consequently to heavy losses.

Finally, intraday traders should avoid placing market orders when they do not have to do it. A market order is an order to buy or sell at the best available price, without specifying which is the price or how quickly that trade is going to execute. Again, this can lead to a number of scenarios of slippage, and this is not necessary or desirable when a daytrader is entering the market as this could cause to buy too high or sell too low.

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