What Is Slippage In Trading? (The Hidden Cost)

Last Updated on April 19, 2022 by Quantified Trading

What is slippage in trading? Slippage is a hidden cost that is difficult to quantify. It’s the difference between a theoretical price and the price you get in real and live trading.

What is slippage in trading?

Slippage is the difference between fictional results when testing strategies, and the actual results in real life adjusting for commissions and transaction costs. It’s a “hidden” cost.

Commissions are a cost we know. However, costs related to buying and selling are not always easy to measure. When you backtest a strategy, the entry and close are estimated on an executed price.

But in real life, you never get those prices. If your test shows an entry on 100, in live trading this strategy might buy those shares at 100.02 – not 100. That means your strategy will be less profitable than when testing. This is slippage!

For example, Apple might have a bid of 172.02 and an offer at 172.09. If you want to go long, what price will you bid at? Will you hit the offer price and buy at the market or will you bid at 172.05?

If you bid 172.05 you might get a better price, but you also risk not buying at all unless someone hits your bid. This is slippage. It’s a hidden cost that a backtest can’t capture.

My experience tells me that the backtest results are always much better than real trading. As a rule of thumb, I anticipate that my backtests will result in 50% lower profits in live trading. Not only because of slippage but also because of the ever-changing market cycles. Testing strategies always curve fits more than you think.

Slippage in trading is normally worse than most traders realize, but it depends on the instruments you are trading. We have earlier provided some real facts from slippage in live trading.

To be on the safe side, when you do backtesting, always be prepared and assume that slippage goes against you.

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    • What do you mean? Slippage is very difficult to measure unless providing liquidity. Most of the strategies i test is usually on the open or on the close, and thus slippage should be minimal.

      • I mean, that backtester should cut some points toward loss on every trade. Yes it’s difficult to measure, but even if you use approximate value in backtesting – I think you should get more accurate result anyway.

        • Hi Mikhail. I take your point but I disagree. As mentioned above, almost all my strategies is based on the opening, on the close or a limit orders. All those should have close to zero slippage unless we move the market. If I test a breakout strategy, that would be another story.

  • Truly wonderful content – Thanks so much for sharing. Hope you’ll have a great 2013!

    I am a beginner running a 200K USD daily algo for a long/short pair trade. My backtesting results are great, but I just learned about slippage and would like to factor that into my backtesting somehow.

    I am trading the DowJ stocks – from your experience, what would be the right number to shave off each transaction due to slippage?