Slippage is the difference between the price you meant to trade at and the price you actually filled at. You aim to buy at 100, the order fills at 100.3, and that 0.3 comes straight out of your edge. It shows up worst in fast markets, thin liquidity, and around news, exactly when you needed your fills to be clean.
Why does slippage happen?
Between clicking and filling, the price moves and the order book changes. Market orders take whatever price is available, so in a thin or fast market you get filled worse than you saw. Big size eats through several levels of the book, each one worse than the last. Even a tight spread costs you, since you often buy at the ask and sell at the bid. The quieter and deeper the market, the smaller your slippage.
How much does it cost you?
More than most traders think. A profitable strategy in backtest can destroy you in live if it assumes perfect execution. Say your expectancy is +0.2R a trade and slippage plus costs eat 0.1R every time, you just halved your edge. On a scalping system trading hundreds of times a month, that's the whole business. The smaller your average win, the more slippage matters.
Can you cut it down?
Some of it, yes. Use limit orders where you can, trade liquid instruments and avoid the first seconds after news. But you can't kill it, and pretending it's zero in a backtest is how paper millionaires are made. The smartest move is to apply a realistic slippage number into your backtest from the start, so the edge you see is the edge you can trade in live market.
Frequently asked questions
Related terms
- R Multiple — Every trade measured against what you risked, where a full stop is always minus 1R.
- Trading Costs — Every commission, spread, and fee that eats your edge before you get paid.
- Live vs Backtest — The gap between how a strategy looked in testing and how it performs with real money.
- Forward Testing — Running a strategy on new market data in real time, before you risk real money on it.