Slippage refers to the difference between the expected price of a trade and the price at which the trade is executed. Slippage transpires on all trading platforms and occurs when;
The requested trade size/volume is bigger than the current bids or offers which causes the execution in the next bid/ask level/s. This is true twice when trading a large amount with a low-volume trading asset.
The market moved very quickly. In this case, we can see a price of $10, decide to enter a trade, send the order, and by the time it executes (which can be in milliseconds) the price has moved to $10.1
It is not caused by a technical issue, but by the market/asset behavior.
What does it mean for you?
Live Trading
When trading assets that are highly traded, it is unlikely to experience slippage. However, when trading assets with low volumes, one can find that the actual execution prices are far from expected prices and can ruin our strategy PnL.
A good practice would be to avoid assets with very low liquidity (trading volume).
Simulated Trading
Capitalise.ai simulated strategies use real-time market data to track the markets just like real live strategies do. The only difference is simulated strategies use a simulated trading engine to track the trades. Simulated orders are executed at the price displayed on the chart at that moment, and do not take into account order book depth, and the associated liquidity of the underlying asset. As such, slippage is not accounted for when utilizing simulated trading.
Backtesting
Capitalise.ai backtest engine uses historical 1-min data to track the markets and calculate trading activity. This engine uses the 1-min bar close price as the price of which to calculate trade entries and exits. In this case, as well, slippage is not accounted for.
Conclusion
In most cases, trading results are similar when comparing live trading, simulated trading, and backtests. When trading assets with lower liquidity, slippage can be spotted when comparing simulations or backtests to real strategies and finding different results or missing hits between them. The reason for these gaps is (almost) always slippage, which affects live trading and does not affect simulated trading and backtesting.
This is something to be generally mindful of when trading low-volume traded assets, and remember not to panic when you are seeing this phenomenon on our platform or elsewhere. In any case, if you need more information or assistance, please contact us on chat.