eToro makes the process of trading and investing as easy and transparent as possible, providing full disclosure on the fees, commissions and costs of trading on the platform. However, sometimes and depending on the market conditions the actual costs of opening and holding positions may not be so obvious and require a little more insight. This mainly relates to spreads and slippage. What are they and how do they affect your trading? Please find a quick guide below.
(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings. In fact, Around 68% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)
What is slippage?
Slippage happens when the price at which the trade is executed is different to the price you placed it for, in simple terms, when the price of your asset changes from when you actually place and order to the moment it is executed. It is an important component of your trading as it directly affects the costs of your positions.
Why does it happen?
Slippage does not occur often but it can happen during the times of extreme market volatility and it can happen when you both open or close the position. Let’s take an example. The stocks of the company below costs 692.53 and the price for them is rising.
Let’s say that you decide to open a long (buy position) on this asset but as soon as the trade has been opened you realize that actually the opening price was 693.00 instead of 692.53. This difference of 0.47 cents that happened is slippage. Yet it is not necessarily a bad thing as this effect can also be beneficial for you. In the example above the slippage effect that happened was negative. But let’s say slippage occurred in the opposite direction and instead the trade was executed at 692.00. Because this is a buy trade, the difference of 0.53 would be in your favor. The same applies for short positions.
Why does that actually happen?
Slippage can happen when prices on the market fluctuate rapidly or because some unexpected news come out as a result of a major event; as a result, the number of traders wanting to enter a buy or a sell trade increases, leading to large trading volumes happening at a fast pace. This may mean the price you set your trade for may not be available for execution on the market anymore and instead you receive the next best available price the broker can provide.
As you hopefully realized, slippage is a cost of trading which is quite different from for example, fees which are just a percentage commission charged by the broker or spreads. Spreads are the differences between the buy and sale prices for an asset charged by the broker; they are usually expressed in pips. Generally, instruments that are more liquid and are desired by many traders tend to have smaller spreads.
Hopefully now you have a better understanding of what slippage is, why it can result in a loss or gain for your trade and how it is different from spread and other costs of trading. Remember that trading involves capital loss risk and enjoy trading on eToro! Best of luck.
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