Understanding Market Gaps and Slippage: How They Affect Your Orders

📉 What is Slippage?

Slippage is a term used to describe when the price at which an order is executed (expected price) does not match the price at which it was requested. Slippage often occurs when the market moves against the trade, often due to market volatility (rapid price movement).

Slippage can also happen when an order is finalized but there is insufficient volume at the selected price for maintaining the bid/ask spread. Additionally, slippage can result from delay in processing the order by the broker. If the transaction processing speed is slow, the original price requested may no longer be available, resulting in the execution price being higher or lower than the set price.

Thus, traders may get an entry at a worse or better price than requested.

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🏷️ Is Slippage Good?

While slippage is not necessarily bad, it is often best to avoid it for a stable trading experience. Slippage risk can be favorable or unfavorable depending on the direction of the price movement. There are three major types of slippage: positive slippage, negative slippage, and no slippage, which will be explained below.

Slippage Type	Description
Positive Slippage	When the execution price follows the trade direction, resulting in a better price for the trader (ask is lower when buying, bid is higher when selling).
Negative Slippage	When the execution price goes against the trade direction, leading to a less favorable price (ask is higher when buying, bid is lower when selling).
No Slippage	The ideal outcome where the trade executes at the exact requested price, providing price stability and predictable outcomes for traders.

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📈 Positive Slippage

Positive slippage happens when the execution price of your trade follows the direction of the position, leading to a more favorable price for the trader. This means that the ask is lower when buying or the bid is higher when selling.

Example:

• If you want to close a buy position at $20.99, but the market rises and your position closes at $21.30, this is positive slippage. The increase benefits you because the position closes at a higher price than intended.
• Similarly, if you plan to buy an asset at $1.50, but before execution, the price drops to $1.47, you benefit by getting the asset cheaper than expected.

📉 Negative Slippage

Negative slippage occurs when the execution price of a trade goes against the direction of the position. This means the ask is higher when buying and the bid is lower when selling.

Example:

• If you aim to buy an asset at $1.55 but the trade executes at $1.77, this represents negative slippage because the price increased, leading to a less favorable entry.
• For sell transactions, if you set a sell price at $1.90 but the order fills at $1.88, this is negative slippage as the lower price goes against the direction of your trade.

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📊 What is a Market Gap?

A Market Gap is a space that appears on a chart when the price of a financial asset changes significantly with little or no trading activity in between. Essentially, it is a gap formed between two consecutive candles. In forex trading, for instance, market gaps often occur over the weekend, overnight, or during public holidays when the market is closed.

Market gaps are usually caused by unexpected or major news events, resulting in sudden price movements when the market reopens. These price differences are visible as gaps on the chart during market closures. Gaps can also appear on shorter time frames following major news or economic data announcements.

Types of Market Gaps:

Type	Description
Exhaustion	Indicates the end of a trend. Often followed by a reversal.
Continuation	Appears in the middle of a trend, signaling its ongoing strength.
Common	Usually short-lived and filled quickly. Often seen in low-volume periods.
Breakaway	Occurs at the beginning of a trend, showing a strong change in direction, which may continue for a prolonged period.

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📉 How Do Market Gaps and Slippage Affect Your Orders?

Market gaps can lead to slippage, affecting stop and limit orders. When slippage occurs, orders may be filled at a different price than requested. The result can be positive or negative, depending on the market direction.

Greater Risk Over Weekends & Holidays:

• Orders during public holidays or weekends may close at prices significantly different from expected, possibly lower than your stop loss.

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✅ Conclusion

Market gaps and slippage can lead to orders not being filled at specified prices, resulting in positive or negative outcomes. Proper risk management strategies can help minimize the effects, such as avoiding overnight or weekend trading and selecting low volatility markets to guard against negative slippage.

❓ FAQ

Question	Answer
What are the 4 Types of Market Gaps?	Exhaustion, Continuation, Common, and Breakaway gaps.
What Causes Slippage?	Slippage is caused by low market liquidity or high volatility, leading to delays in finding buyers or sellers, resulting in price differences.
How Do You Avoid Gap Trading?	Avoid holding positions overnight or through weekends.
Is Slippage the Same as Market Gap?	No, slippage is the difference between desired and executed price. Market gaps can cause slippage and occur due to low trading activity.
What is Low Volatility?	A market condition where asset prices remain stable with minimal dramatic changes, reducing risk.