What Is Slippage in Trading? Understanding How & Why Slippage Happens

What is slippage in trading?

Sometimes, a trade executes at a higher or lower price than you originally expected. This is called slippage. As an example of what slippage means, imagine placing a market order for 100 YES contracts predicting whether President Trump will impose new tariffs before the end of the year.

The lowest asking price is $0.43, but only 50 contracts are available at that price. The remaining 50 fill at $0.47, bringing your average purchase price to $0.45. That’s $0.02 per contract in slippage.

Slippage can also occur when trading sports event contracts on prediction markets. If you’re interested in how this differs from sports betting, check out our guide to prediction markets vs sportsbooks.

Pros and cons of slippage in trading

Pros and Cons

• Positive slippage can result in better prices
• May increase potential returns
• Limit orders help avoid slippage

• Negative slippage can increase trading costs
• Can reduce potential profits

What causes slippage in trading?

Slippage doesn’t happen without reason. It is caused by three main factors that affect how trades are executed. Let’s take a look at each one.

Liquidity

Whether you’re trading cryptocurrencies, forex, or prediction market contracts, liquidity is often the main factor behind slippage. In markets with low liquidity, fewer buy and sell orders are available at each price level. This means your order may need to execute at less favorable prices if there aren’t enough buyers or sellers willing to trade at your expected price.

Order size

Even in markets with high liquidity, you may still experience slippage. This happens when your order size is larger than the amount available to trade at your expected price, causing the remaining portion to execute at less favorable prices. In our earlier example, an order for 100 YES contracts exceeded the 50 available at $0.43, so the remaining 50 contracts had to be purchased at $0.47.

Market volatility

Market volatility, meaning how much prices fluctuate over time, can also cause slippage, even when there’s plenty of liquidity and your order is relatively small. Going back to our earlier example, if breaking news suddenly makes new tariffs much more likely, the price of YES contracts could jump from $0.43 to $0.80 within seconds. If this happens before your order executes, you could end up paying a much higher price than expected.

Tips for reducing slippage in trading

It’s not always possible to avoid slippage entirely, but there are ways to reduce it. Here are some practical tips to help you do just that.

Slippage vs spread: What’s the difference?

Before we wrap things up, let’s clear up a common misconception: that slippage and the spread are the same thing. While both can affect trading costs, they are two different concepts. The spread is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask). Slippage, on the other hand, is the difference between your expected execution price and the price you actually get.

To make the difference clearer, let’s revisit our earlier example:

The bottom line on slippage in trading

Slippage is often less of a concern for smaller trades in liquid markets, but it can become more significant when placing larger orders or trading during periods of high volatility. While you can’t always avoid it, choosing liquid markets, using limit orders, and splitting up larger trades can help reduce its impact. If you’re ready to put that knowledge into practice, click one of the banners on this page to visit a recommended prediction market and start trading.

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