How to Manage Slippage in Trading: A Real Trader’s Guide

Introduction:

Slippage is one of the most common concepts in the trading world, but it's also one of the most misunderstood. Whether you are trading stocks, commodities, or indices, slippage is something you can't entirely avoid. However, understanding it and managing it effectively can be the difference between profitable and unsuccessful trades.

This blog will break down slippage in simple terms, show you how it happens in real trading scenarios, and explore how QuantMan, an advanced trading platform, can help you manage slippage and maximize your returns. Slippage has impacted many of my trades, especially when trading high-volatility stocks or during periods of low liquidity. But with the right tools and strategies, slippage can be minimized or even turned into an opportunity.

What is Slippage?

Slippage happens when the price at which you execute a trade is different from the price you saw when placing the order. It's the gap between the expected price and the actual price of the asset when your order gets filled. In other words, you intended to buy or sell at a specific price, but by the time your order is processed, the market has moved.

For example, if you decide to buy a stock at ₹100 per share, but by the time your order is executed, the price jumps to ₹102, you’ve experienced slippage of ₹2. On the flip side, slippage can work in your favour too. If you wanted to buy at ₹100 and your order gets executed at ₹98, that’s positive slippage.

For Example: Let’s say you're looking to buy shares of Reliance Industries on the Bombay Stock Exchange (BSE) at ₹2500 per share. The market looks stable, and you place your buy order for 100 shares. However, due to high market volatility caused by recent news, the price jumps to ₹2550 before your order is executed. You have just experienced slippage of ₹50 per share, resulting in a higher purchase price than expected.

Types of Slippage

1. Positive Slippage: Positive slippage occurs when the price moves in your favour. For example, if you place a buy order for Tata Motors at ₹400, but by the time the order is filled, the price is ₹395, you’ve received a better price than you expected. This could lead to better profit potential when you sell.
2. Negative Slippage: Negative slippage happens when the price moves against you. If you placed a buy order at ₹400 for ICICI Bank, but your order is filled at ₹405, you have experienced negative slippage of ₹5 per share, which means you paid more than anticipated.

Why Does Slippage Happen?

Slippage can occur for several reasons. Understanding these factors can help you minimize or manage slippage more effectively in your trades.

1. Market Conditions: Slippage is more common during periods of high volatility. When significant news or events affect the stock market, prices can change rapidly, causing slippage.

For example, if there is a government announcement impacting sectors like banking or pharmaceuticals, the price of stocks in those sectors can move very quickly, causing your order to be filled at a different price than expected.

1. Low Liquidity: Slippage is more likely when there is low liquidity in the market. If there aren’t enough buyers or sellers at the price you want to trade at, your order might get executed at a worse price. This is especially true for stocks that are less frequently traded or have lower daily trading volumes.

Example: If you are trading a mid-cap stock, which may have a daily trading volume of around 10,000-20,000 shares, your order may not get executed at the expected price if there is not enough activity at that level. If you place a market order to buy 1000 shares at ₹500, the price might move higher as there’s not enough selling interest at ₹500.

3. Order Types:

· Market Orders: These are orders that get filled immediately at the best available price. Market orders are more likely to experience slippage because you are agreeing to accept whatever price the market offers at that moment.

· Limit Orders: With a limit order, you specify the exact price you’re willing to pay. The order will only be filled at that price or better. While limit orders can protect you from slippage, there's a risk that your order may not be executed if the market price never reaches your limit.

How to Avoid or Manage Slippage

1. Use Limit Orders: One of the most effective ways to avoid slippage is by using limit orders. A limit order ensures that your order will only be executed at the price you specify, protecting you from negative slippage.  If you are using QuantMan, the automated trading platform, you can set limit orders with the exact price you're willing to pay.

For example, you might set a limit buy order at ₹700, and the order will only be executed when the market price reaches that level or lower. This prevents you from buying the stock at a higher price due to sudden price movements.

2. Monitor Market Conditions: Staying informed about market news and events is essential for managing slippage. If you're trading during periods of high volatility, such as during earnings season or after major announcements, slippage becomes more likely. It’s best to avoid placing orders during such high-risk periods, especially when liquidity might be lower.
3. Back-testing Slippage Impact: QuantMan allows you to backtest your trading strategies and see how slippage might affect your results. This is an excellent way to understand the potential impact of slippage on your strategy before you risk real capital. By using back-testing, you can reframe your approach and reduce the chances of slippage affecting your profits.

For Example: Before trading, you can backtest a strategy on QuantMan to analyse how slippage might have affected your past trades. Based on this data, you can adjust your order execution strategy to minimize the risk of slippage.

Conclusion:

Slippage is a predicted part of trading, but it doesn’t have to eat into your profits. By using platform like QuantMan, which allow you to set limit orders, track market conditions, and backtest strategies, you can manage slippage more effectively. QuantMan's fast execution and slippage control tools make it the perfect platform for traders who want to avoid the unpredictable nature of slippage in volatile markets.

As someone who has experienced the challenges of slippage, I can say the importance of having the right platform and strategies in place. With the help of QuantMan, traders can minimize the risk of slippage, avoid losing money on unfavourable trades, and ultimately maximize their trading returns.