In the context of trading, slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed. Slippage often occurs during periods of higher volatility when market orders are used, and also when large orders are executed when there may not be enough interest at the desired price level to maintain the expected price of trade.
There are two types of slippage: positive and negative. Negative slippage is when a trade is executed at a worse price than initially expected. This typically occurs when buying a security at a higher price or selling at a lower price. Positive slippage, on the other hand, happens when a trade is executed at a better price than what was initially expected. This usually occurs when buying a security at a lower price or selling at a higher price.
While traders usually aim to avoid negative slippage, some market conditions make it inevitable. Factors that can influence slippage include liquidity, market volatility, and the type and size of the order. To limit the risk of slippage, traders often use limit orders instead of market orders, as limit orders only execute at the set price or better.