Definition in one sentence: slippage is the gap between the price expected at the moment of the decision and the price actually obtained at execution — a very real execution cost.
What it measures, and where it comes from
Between the instant a system decides to buy and the instant the order is actually filled, the price has moved. That gap is slippage. It comes from three main factors: the market's volatility at that moment, the available liquidity, and the order size relative to the order book.
Not to be confused with the spread: the spread is the permanent gap between bid and ask; slippage is the additional gap caused by the market moving during execution.
How to read it
Slippage is almost always a cost (rarely a gain). It worsens in three situations: choppy markets (announcements, opens), illiquid assets, and large orders. A strategy that trades often or on thin pairs is far more exposed to it than a patient strategy on highly liquid assets.
The classic mistake
Building a backtest that assumes perfect execution at the displayed price. It is the costliest illusion in systematic trading: a strategy can show a superb profit factor in backtest and become a loser in real life, simply because slippage was not modelled. An honest backtest always includes a realistic slippage assumption.
At Sextant
Sextant is a transparent quant platform: backtests are versioned with real costs modelled per pair — fees and slippage included — to never oversell performance. It is one of the engine's owned differentiators. The methodology details the cost assumptions, and the dashboard shows performance net of these costs.
Frequently asked questions
What is the difference between slippage and spread?
The spread is the permanent gap between the best bid and the best ask, paid on every transaction. Slippage is the additional gap between the expected price and the price obtained, caused by the market moving during execution. Both are distinct real costs.
How do you reduce slippage?
By trading liquid pairs, avoiding moments of high turbulence (announcements, opens), limiting order size relative to the order book, and using suitable order types. You never eliminate it entirely: it is part of the execution cost.
Why does slippage distort backtests?
Because many backtests assume perfect execution at the displayed price. In real life, slippage reduces every gain and worsens every loss. A strategy profitable on paper can become a loser once slippage is accounted for. A reliable backtest models it.