What Is Slippage, and How Much Does It Really Cost?

Slippage is the difference between the price you expected when you decided to trade and the price your order actually filled at. It is one of the least glamorous numbers in trading and one of the most decisive, because it is the main reason a strategy that looks profitable on paper can lose money in a live account.

Where slippage comes from

Three sources account for most of it.

The spread is the first and most constant. You buy at the ask and sell at the bid, so a round trip starts slightly underwater before the position has done anything. On liquid markets this is small; on thin ones it is not.

Market impact is the second. A market order consumes resting liquidity from the top of the book down, and the larger your size relative to what is available, the further down the book you reach and the worse your average fill. A size that is invisible in a deep market moves the price in a shallow one.

Speed and gaps are the third. Between the moment you decide and the moment your order arrives, the price can move, and in fast or news-driven conditions it tends to move against the direction you were trying to take.

Why backtests hide it

A backtest almost always fills cleanly: at the last traded price, or the mid, with no spread crossed and no impact, every single time. Reality fills you a little worse on the way in and a little worse on the way out.

The damage scales with frequency. On a strategy that trades a couple of times a year, a tick of slippage per side is a rounding error against the size of each move. On a strategy that trades many times a day, that same tick, paid on every entry and every exit, is a constant tax that can be larger than the edge it is eroding. Two strategies with the identical signal can end up on opposite sides of break-even purely because one trades ten times as often, and the backtest that ignores execution will rate them the same.

Measuring yours instead of guessing

The only slippage number that matters is your own, and it is knowable rather than mysterious. For every fill you have two prices: the one you intended and the one you received. The average gap between them, counted on both entry and exit, is your real per-trade slippage. Guessing it low is the optimism that makes a backtest look like an edge; measuring it is what turns a backtest into a plan.

Slippage belongs to the same family as fees, the spread, and the roll: costs that are subtracted from your result whether or not your directional call was correct. That is why the honest question about any strategy is never only whether it has an edge, but whether the edge is large enough to survive what it costs to trade. Separating those two is the whole subject of our case study.