How Markets Work · Intermediate · 5 min

Slippage and gaps

You can explain why an order fills at a worse price than expected and why a stop does not protect you from a gap.

The market skipped your price

You bought a share at 50 and set a stop at 48, to keep your loss at 2 per share. The next morning you open your app. You were sold, but at 45.80, not at 48.

Nobody cheated you, and the order did exactly what it was built to do. The market simply never traded at 48. Understanding why that happens is one of the most important lessons in trading, because it decides how large a loss can really get.

Expected price, filled price

Slippage is the difference between the price you expected and the price your order was actually filled at. It can work for you, but most of the time it works against you. It has three common causes:

Your order is bigger than the best level. As you saw with the order book, a large order walks through several prices.
The price moves before your order arrives. In a fast market, the quote you saw a moment ago may already be gone.
The book is thin. With few orders near the price, the next level can be far away.

The SEC puts it plainly: the price a market order is filled at often differs from the last traded price or the quote you saw.

A gap is the extreme case: a jump between two prices with no trading in between. On a chart it shows up as empty space between two candles. Gaps usually happen when a market is closed and news arrives, such as company results after the close, or over a weekend. They can also happen during trading, when big news hits a thin market.

A stop order does not protect you from a gap. When the stop price is reached, the stop becomes a market order and fills at the next available price. The SEC warns that this fill can be far away from the stop price.

A stop meets a gap

A fictional stock, bought at 50.00, with a stop at 48.00. The planned loss: 2.00 per share.

Day 1 and 2: the stock drifts down to 49.20, the stop is not touched.
After the close on day 2, the company cuts its forecast.
Day 3 opens at 45.80. The price has jumped from 49.00, the previous low, straight past 48.

The stop is triggered at the open and fills at about 45.80. The actual loss is 4.20 per share, more than twice the plan. With 100 shares, the planned loss of 200 has become 420.

Common mistakes

"My stop guarantees my exit price." It guarantees a trigger, not a price.
Sizing trades for the planned loss only. Ask what happens if the price gaps twice as far.
Holding through known events without a plan. Results, central bank decisions and weekends are when gaps are most likely.
Using market orders in thin markets. In a thin book, slippage on a single order can cost more than the fee.
Blaming the broker for every bad fill. Slippage is usually the market, not manipulation. Check the chart for a gap or a spike first.

The takeaway

Slippage is the gap between the price you expected and the price you got. Gaps make it large, and a stop cannot prevent it, so size your trades for it.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the candle at which the stop at 48.00 was filled.

Tap the chart.

The price never traded at 48. It opened at 45.80, and that is where the stop, now a market order, was filled.
2You place a market order to buy at an ask of 25.00 and get filled at 25.06. What is the slippage?

Slippage is the difference between the price you expected and the price you got: 25.06 − 25.00 = 0.06.
3Why does a stop order not protect you from a gap?

The SEC points out that the stop price is a trigger, not the price you will get. After a gap, the next available price can be far away.
4When is slippage usually largest?

Few orders near the price and fast moves mean a market order has to walk further through the book.

of 4 correct.