What is Slippage?
Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed. It occurs across all trading platforms and happens under the following conditions:
Order size exceeds available liquidity: When the requested trade size or volume is larger than the current bids or offers, the trade executes at the next available bid or ask level. This is especially true when trading large amounts in low-volume assets.
Fast-moving markets: If the market price moves quickly, the price you see when placing an order may change before it’s executed. For example, you might see an asset priced at $10, decide to enter a trade, but by the time the order is processed (which may only take milliseconds), the price could have shifted to $10.1.
Slippage is not caused by technical issues but is a natural part of market behavior.
What Does Slippage Mean for You?
Live Trading
In highly liquid assets with a high trading volume, slippage is usually minimal or non-existent. However, when trading assets with low liquidity, you may experience significant slippage, which can lead to execution prices that differ substantially from the expected price, impacting your strategy's profit and loss (P&L).
Best Practice: Avoid trading assets with very low liquidity or low trading volume to minimize slippage risks.
Simulated Trading
Capitalise.ai simulated strategies use real-time market data to track market conditions, just like live strategies. However, the key difference is that simulated strategies utilize a simulated trading engine to handle trade executions. In simulated trading, orders are filled at the price displayed on the chart at that moment. Slippage is not accounted for in simulated trading because it doesn’t consider order book depth or the liquidity of the underlying asset.
Backtesting
In backtests, Capitalise.ai uses historical 1-minute data to simulate market conditions and calculate trading activity. The backtest engine uses the closing price of each 1-minute bar to determine trade entries and exits. Like simulated trading, slippage is not considered in backtests, as they rely on historical data that doesn’t account for real-time market movement.
Conclusion
In most cases, trading results are similar when comparing live trading, simulated trading, and backtests. However, slippage can cause discrepancies when comparing simulations or backtests to real live strategies - especially with low-liquidity assets. If you notice differences or missed trades between these modes, the likely cause is slippage, which impacts live trading but does not affect simulated trading or backtests.
Be mindful of this phenomenon when trading low-volume assets, and remember, it’s a natural market occurrence. If you encounter slippage on our platform (or elsewhere), there’s no need to panic.
For further information or assistance, feel free to reach out to us via chat.