in trading and investing The trader or investor should have a trading plan or trading planning document. In this transaction there are various details. of the strategies investors and traders will use in the future This includes the price level at which the investor will trade the asset.
Unfortunately, not all plans in the trading plan will work. for any reason Your strategy may fail. This includes if you are forced to sell the asset at a price different from your plan’s selling price. This phenomenon is called slippage.
The linguistic meaning of slippage is slip.
while in the world of trade and investment Slippage is the difference between the planned asset price and the operating asset price level..
For example, let’s say you expect to sell BBCA shares at 7,500 per share, but for whatever reason. You must sell the shares of the largest private bank for 7,000 per share. The difference between 7,500 and 7,000 is what is known as slippage.
Slippage can also occur when an investor or trader wants to buy a large volume of the instrument. But no one else sells these instruments in the required volume.
For example, you want to buy 1,000 shares of BBCA. However, when you open an open long position, no BBCA stock investor sells that amount of their shares. As a result, your transaction may be delayed or processed. But the price differs according to the level of market absorption.
It should be understood that discrepancies do not always have a negative connotation.
This condition can be positive if:
- The purchase price of the asset in the market is lower than the investor expects to buy the asset.
- The selling price of the asset in the market is higher than the price the investor expects to sell.
Slippage is a condition or phenomenon that is natural and difficult to avoid in trading and investing in any instrument. However, this does not mean that slippage risk cannot be minimized. This article discusses how to avoid and the effects of this condition.
Understanding Slippage Tolerances
Slippage tolerance is the level of slippage allowance you can accept. so that when the price of the instrument falls below or above this acceptable level Your transaction will not be processed.
The term slippage discrepancy is commonly used in crypto transactions. Let’s take a look at an example of a cryptocurrency transaction.
For example, let’s say you want to buy NFT on the NFT Marketplace with a price of 100 BTC and a slippage allowance of 2% is applied. This means that the system will not transact if the NFT price increases from 100 BTC to 102 BTC or decreases from 100 BTC to 98. BTC
For traders and investors (Especially those who need impromptu money) the existence of slip resistance properties is important. This is because investors who sell their assets generally use a sudden market order system. This means that investors cannot set exact selling prices when transacting.
Cause of slippage
Stocks, Forex and other trading instruments It is a market that uses a complete information system. That is in this instrument market. Transactions will not be executed without the same price and trading volume from the opposing party.
For example, you buy BBCA shares for 7,500 and 1000 lots. This transaction will not be executed if there are no sellers willing to sell BBCA shares at 7,500 per share, or it will be slightly delayed if there are sellers who sell the shares. BBCA at 7,500 per share but with fewer shares
Slippage occurs when the price and quantity of goods set by seller and buyer differ. Therefore, this is a common condition in capital and commodities markets. And it happens more often when the price volatility of the instrument is high. Either because of the news or due to the nature of the instrument itself.
This may sound absurd. But discrepancies can occur if you sell your asset using a market order mechanism without first looking at the asset’s bid/ask price. It could be because you need to get paid quickly or because of FOMO.
How to avoid slipping
1. Determine slippage tolerance.
This is because slippage conditions are often inevitable. You should first determine the slippage tolerance level in your trading plan. The goal is to let you know when you need to be ready to sell your asset when the price drops or rises from your desired price level.
Some forex brokers have the feature to implement price tolerances. If you are a forex trader, make sure to install this tolerance in the trading application you are using.
2. Use limit orders
The opposite of a market order is a limit order. A limit order is an order to buy or sell an instrument with a certain price level or trading volume. In this mechanism, a buy or sell order is not executed by the system when the existing price level or trading volume is not favorable. yours
The advantage is that you can acquire or sell assets at the price and quantity you want. The first drawback is that you miss out on a golden opportunity by selling the asset at the highest price. The second downside is that you have to wait until another investor or trader sets a buy price for the same asset as you, so it takes longer.
3. Avoid trading when price fluctuations are high.
The third way to avoid slippage is to not trade when the asset’s price is highly volatile. High price volatility is often seen in illiquid or highly liquid instruments. But when there is big news that can affect the price of these instruments.
For example, when announcing non-agricultural salary In the forex market or when there is a corruption scandal in the leadership of the company. Negative news tends to encourage most investors to sell their assets so that there is a gap between the sold volume and the purchased volume.
4. Set an approximate price.
Discrepancies can occur if the trader or investor is unable to accurately and accurately determine the expected price. In fact, to be able to determine the expected price requires extensive practice and research. Investors and traders can read research findings from a team of investment experts to solve problems. This team of investment specialists is usually provided by a brokerage firm or service provider. stock screening app For customers with premium accounts