Volatility, gaps and slippage
The previous lesson explained margin calls and stop outs. This lesson looks at how volatility, price gaps and slippage can change execution prices and make losses larger than expected. Understanding these effects helps explain why a planned exit price is not always an achievable price, especially when trading leveraged forex and CFDs.
Volatility and liquidity
Volatility describes how much and how quickly prices change over a period. Higher volatility means larger or faster price movements, but it does not indicate which direction prices will move. Economic announcements, unexpected news and changing market expectations can all increase volatility. A position that usually moves gradually may suddenly gain or lose value much faster.
Liquidity describes the availability of buyers and sellers at different prices. When liquidity is limited, there may not be enough trading interest to fill an order at the price displayed when it was submitted. Volatility and liquidity are different concepts, but they can interact: rapid movements combined with limited liquidity can increase execution uncertainty. Spreads—the difference between bid and ask prices—may also widen, affecting entry prices, exit prices and unrealised losses.
When prices gap
A price gap occurs when the next available price is different from the previous price, with no available prices in between. Gaps can appear when a market reopens after a weekend or trading break and reacts to news released while it was closed. They can also occur during trading hours when information changes rapidly or liquidity becomes very limited.
A gap matters because an order cannot necessarily execute at a price that the market has skipped. If a market moves directly past a stop-loss level, an ordinary stop-loss order may be filled at a worse available price. The same movement can sharply reduce account equity and available margin. As discussed in the previous lesson, stop-out liquidation is a protective account mechanism, not a guarantee of a particular exit price.
Slippage and order types
Slippage is the difference between an order's expected or requested execution price and its actual fill price. It can be unfavourable or favourable. For example, a buy order filled above the expected price has unfavourable slippage; a buy filled below it has favourable slippage. Fast price changes, available liquidity, order size and the time between submission and execution can all influence the result.
Market orders seek execution at available prices rather than guaranteeing a specified price. Ordinary stop-loss orders generally trigger an instruction to close a position once the relevant price reaches the stop level, but the fill can differ from that level. Limit orders set a price boundary: execution must be at that price or better, but execution is not assured. The precise trigger and execution rules depend on the instrument and applicable trading terms.
Worked example: a skipped stop
Consider a hypothetical EURUSD buy position of 0.20 standard lots, opened at 1.1000, with a stop-loss at 1.0950. A standard lot is 100,000 units, so this position represents 20,000 euros. One pip on EURUSD is worth USD 10 per standard lot, making the pip value USD 2 here. The planned distance is 50 pips, giving a price-based loss of USD 100 if execution occurs exactly at the stop.
Suppose the market gaps through the stop and the position is instead closed at 1.0920. The actual entry-to-exit distance is 80 pips, so the price-based loss is 80 × USD 2 = USD 160. The 30-pip adverse difference from the stop level adds USD 60 to the planned loss. These hypothetical calculations exclude commissions and financing charges. They show why a stop-based risk calculation is an estimate, not a guaranteed maximum loss.
Planning for execution uncertainty
Risk planning can distinguish between the intended stop-loss outcome and a more adverse execution scenario. Relevant considerations include position size, available margin, trading hours and exposure during scheduled announcements or market closures. Smaller exposure reduces the money gained or lost for a given price movement, but it does not prevent gaps or slippage. Extra margin may provide a buffer, but it does not cap losses.
On MT5, trade history can help compare recorded entry and exit prices with planned levels. When reviewing a chart, remember that bid and ask prices differ, and the displayed chart may not show both. Review the instrument specifications and applicable order rules before interpreting an unexpected fill. CFDs are leveraged and carry a high risk of loss; execution uncertainty can deepen the drawdowns covered in the next lesson.
- Volatility measures price movement; liquidity affects execution at available prices.
- Gaps can skip stop levels and quickly reduce account equity.
- Slippage can be favourable or unfavourable; ordinary stops do not guarantee exit prices.
- Risk estimates should account for execution uncertainty, not just the planned stop distance.