Slippage is the difference between the price requested in an order and the price the order is executed at, typically caused by changing market conditions. Slippage often occurs during periods of high volatility or when the bid/ask spread changes during the execution of large order quantities.
For example, say EUR/USD’s bid/ask spread is listed as 1.09949/1.09961 on your trading platform. A market order to buy euros is submitted, with the expectation that you will be paying 1.09961 US dollars for every euro. However, if the EUR/USD is experiencing high volatility, the bid/ask price may change while executing your order. In this case, the price rises to 1.09978/1.10002. Now some or all of your market order executes at a higher price, pulling more US dollars from your account than you might have expected. These small movements in the bid/ask spread can become big headaches when trading large volumes of a security, as is typical in forex and other markets.
Slippage can happen in any market and is more likely to occur during times of high volatility or high liquidity in a market. You can reduce or eliminate slippage by using limit orders instead of market orders. Limit orders are set up to only fill at the price requested, or better, and won’t execute at worse prices, unlike market and stop-loss orders.
You can also order a guaranteed stop in which your position is closed out at the price you specify, regardless of market volatility, slippage or gapping. Guaranteed stops are often free to attach, but your brokerage will charge you a premium if the order is triggered.