When you place a trade on a Contracts for Difference (CFD) platform, you expect your order to fill at the price you saw when you clicked "buy" or "sell." In many cases, that is exactly what happens. But in fast-moving markets, around economic news releases, at market open, or during low liquidity periods, your order may execute at a substantially different price. This phenomenon is known as slippage when the price moves gradually, and gapping when the price jumps from one level to another without trading at intermediate prices.
Understanding why and when these price deviations occur is essential for any CFD trader. Slippage and gapping are not errors; they are natural consequences of how markets work. This article explains the mechanics behind them, shows you how to anticipate them, and provides strategies to reduce their impact on your trading.
What Is Slippage?
Slippage is the difference between the expected price of a trade and the price at which the trade is actually executed. It can be positive (working in your favour) or negative (working against you). Slippage occurs because markets are dynamic and orders take a fraction of a second to process. During that time, the price can move.
Slippage is most common with market orders, orders that are executed immediately at the best available price. Unlike a limit order, which specifies a maximum or minimum price, a market order guarantees execution but not the price. In liquid markets with high trading volume, slippage tends to be minimal. In thin markets or during news events, it can be significant.
Example of Slippage
Imagine you want to buy 10 CFDs on Apple Inc. (AAPL). The current ask price is $150.00. You place a market order. During the milliseconds it takes your broker's system to route the order to a liquidity provider, the ask price moves to $150.05. Your order fills at $150.05. That $0.05 difference per share is slippage. On 10 CFDs, you pay an extra $0.50 (excluding commissions). If the price had moved to $149.95, you would have positive slippage.
Slippage is not unique to CFDs. It happens in stock, forex, and futures markets as well. However, because CFDs are leveraged products, slippage can have a disproportionately large effect on your margin requirements and overall risk.
What Is Gapping?
Gapping is an extreme form of slippage where the price jumps from one level to another without trading at any prices in between. Gaps occur most often when markets are closed (overnight or over weekends) and reopen at a significantly different price. They also happen during sudden news events when trading is halted and then resumes.
Gaps are visible on price charts as a blank space between two candles. For a CFD trader, a gap means your stop-loss order or limit order may be executed at a price far away from the level you set, if it gets triggered at all.
Example of Gapping
Suppose you hold a long CFD position on the FTSE 100 index. The market closes on Friday at 7,500 points. Over the weekend, a major geopolitical event occurs. On Monday morning, the FTSE 100 reopens at 7,300 points. Your stop-loss at 7,400 remains in the gap, it never gets activated because the market never traded at 7,399, 7,398, etc. Your broker will fill your stop order at the next available price, which could be 7,300. That is a loss of 200 points instead of the 100 points you expected to lose.
Why Slippage and Gapping Happen
To control slippage and gapping, you need to understand the market forces that cause them. Here are the primary drivers:
Liquidity
Liquidity refers to the number of buyers and sellers in a market at any given moment. High liquidity means you can enter and exit positions with minimal price movement. Low liquidity, typical for small-cap stocks, exotic forex pairs, or during holidays, increases the likelihood of slippage because there are fewer counterparties to fill your order.
For example, trading CFDs on Tesla (TSLA) during US market hours usually offers tight spreads and minimal slippage. Trading CFDs on a thinly traded Brazilian stock outside of Brazilian trading hours is far more likely to result in price deviations.
Volatility
Volatility measures how much and how quickly a price changes. Sudden spikes in volatility are common during economic releases (e.g., Non-Farm Payrolls, interest rate decisions), earnings announcements, and geopolitical shocks. When volatility is high, the price can move 10-20 points in a single second, long enough for your order to experience slippage.
CFD brokers often widen their spreads during volatile periods to protect themselves. Even without a spread change, the price you see on your screen may already be outdated by the time your order reaches the market.
Market Structure and Order Types
The type of order you use determines your exposure to slippage:
- Market orders, executed immediately at the next available price. Highest slippage risk.
- Limit orders, executed only at a specified price or better. No slippage risk, but may not be filled if the price never returns to your level.
- Stop orders, become market orders once a certain price is hit. Vulnerable to slippage and especially to gapping.
- Stop-limit orders, become limit orders after a stop is triggered. Offer price control but may fail to fill in fast markets.
Broker Execution Model
CFD brokers use different execution models. Market maker brokers quote prices themselves and often fill orders internally, which can reduce slippage but may introduce conflict of interest. Straight-Through Processing (STP) brokers pass orders directly to liquidity providers, which can increase slippage but provides more transparent pricing. Electronic Communication Network (ECN) brokers aggregate prices from multiple sources and show the best bid/ask, which tends to reduce slippage but may require higher minimum deposits.
It is worth checking your broker's order execution policy and typical slippage metrics. Some brokers publish statistics on the percentage of orders that experience slippage and the average slippage amount.
The Impact on Your Trading Costs
Slippage and gapping directly affect your profitability. They are part of your total trading costs alongside the spread and commissions. While you can predict the spread and commissions fairly accurately, slippage is variable and can sometimes be the largest cost of a trade.
Consider a day trader who trades the EUR/USD pair with a stop-loss of 10 pips. In normal conditions, the spread is 0.8 pips, and there is little slippage. But during the US jobs report, the spread widens to 3 pips and slippage adds another 2 pips. The effective stop-loss distance becomes 15 pips instead of 10, increasing the risk of a margin call if the trade goes against you. Margin calls accelerate the cascade.
Over many trades, even small slippage eats into returns. Backtests often assume perfect execution with no slippage, which overstates performance. Real-world traders should add a slippage buffer, typically 0.5 to 2 ticks per trade for liquid markets and more for illiquid ones.
How to Manage Slippage and Gapping
You cannot eliminate slippage and gapping entirely, but you can reduce their frequency and severity with disciplined trading practices.
Trade During Liquid Hours
The simplest way to reduce slippage is to trade when the underlying market is open and active. For example:
- US stocks: 9:30 AM, 4:00 PM Eastern Time
- Forex majors: London and New York overlap (1:00 PM, 5:00 PM GMT)
- Commodities: follow the hours of the relevant futures exchange (e.g., COMEX for gold, NYMEX for oil)
Trading CFDs on US equities during the European evening, when US markets are closed, often results in wider spreads and higher slippage. Similarly, forex pairs that involve emerging-market currencies trade best during the local market hours.
Avoid News Releases
Major economic news can cause extreme volatility in the seconds after release. The US Non-Farm Payrolls report on the first Friday of every month is notoriously volatile. If you hold a position into that release, your stop-loss may slide or gap by a large amount. Many experienced traders either close positions before the news or reduce position size. Alternatively, you can use guaranteed stop-loss orders (GSLO) offered by some brokers. These guarantee your stop level regardless of gaps, but they come with a premium fee (often a fixed amount or a wider spread).
Use Limit and Stop-Limit Orders
Whenever possible, use limit orders instead of market orders. A limit order gives you price certainty, you will never get a worse price than you specify. The trade-off is that your order may not be filled if the market moves away. Stop-limit orders combine a stop trigger with a limit price, giving you control over the maximum slippage you accept. For instance, you can set a buy stop-limit order with a stop at $100 and a limit at $101. If the price gaps to $104, your order will not be triggered because the limit price is not met. This protects you from adverse gaps, but also means you may miss the trade entirely.
Reduce Leverage
Since CFDs are leveraged, the impact of slippage is multiplied. A 1% adverse slippage on a position with 10:1 leverage translates to a 10% loss of your margin. By using lower leverage, you increase your buffer for price deviations. For example, if you trade with 5:1 leverage instead of 20:1, the same slippage has a much smaller relative impact on your account equity.
Monitor Overnight Financing Costs
If you hold a position overnight, you will incur or receive overnight financing charges. These are separate from slippage, but they add to the cost of holding a position. If you are trading around a market gap (e.g., holding over the weekend), you are exposed to two costs: the financing charge for the weekend (usually triple on Wednesdays for forex) and the potential gap. Planning your entry and exit timings can reduce this double exposure.
Choose a Reliable Broker
Not all brokers handle slippage equally. Some offer price improvement or use execution algorithms that seek the best price across multiple liquidity providers. Others may have a reputation for re-quoting or widening spreads significantly during news. Before opening an account, read the broker's execution policy and check if they offer negative balance protection (in case of extreme gapping that wipes out your account). CFDs are complex instruments, choose your broker carefully.
Real-World Examples of Gapping
Historical gaps have cost traders large sums. Several notable cases illustrate the power of gapping:
- Swiss National Bank (SNB) de-pegging of EUR/CHF (January 15, 2015): The SNB unexpectedly removed the cap of 1.20 EUR/CHF. The franc soared, and EUR/CHF dropped from 1.20 to 0.85 within minutes. Many retail forex and CFD traders with stop-losses at 1.18 were filled at 0.95 or worse. Some brokers went bankrupt, and traders owed money on accounts that went negative.
- Apple (AAPL) earnings surprise (e.g., October 2019): After hours, Apple announced better-than-expected results. The stock gapped up 3% the next day. A trader with a stop-loss on a short position at $220 would have been filled at $227, incurring an extra $7 per share of loss.
- Crude oil futures drop to negative (April 20, 2020): The May 2020 WTI crude oil futures contract settled at -$37.63 per barrel. CFDs on oil prices followed. Traders who held long positions with stop-losses at $10 or $5 found themselves liquidated at negative prices, owing money beyond their initial deposit.
These extreme events are rare, but they remind us that both long and short positions are vulnerable to gaps. Even if you are right about the long-term direction, the gap can take you out of the trade.
Slippage vs. Spread: What Is the Difference?
Traders sometimes confuse slippage with the spread. The spread is the difference between the bid and ask prices at a given moment, it is a known cost. Slippage is the difference between the price you expected and the price you got, which is not known until the order is executed.
For example, if the EUR/USD bid/ask is 1.1000/1.1002, the spread is 0.0002 (2 pips). If you place a market order to sell and the bid fills at 1.0998 because the price moved, you have 0.2 pips of negative slippage on top of the spread. So your total transaction cost is the spread plus slippage.
In volatile markets, the quoted spread may also widen. A broker might show a 2-pip spread on GBP/USD normally, but during news it may become 10 pips. That is not slippage per se, it is a wider spread. However, your order may also slide within that wide spread. The combination can result in a much worse fill than the pre-trade screen indicated.
The Role of Technology in Reducing Slippage
Modern trading platforms use several techniques to minimise slippage. The most important is low-latency connectivity. Brokers locate their servers in the same data centres as liquidity providers, often in Equinix NY4 (New York) or LD4 (London). This cuts the time for an order to travel from your click to the execution engine from maybe 100 milliseconds down to under 1 millisecond. Every millisecond matters in a fast market.
Some brokers also offer fractional pricing, allowing them to fill orders at the exact price available rather than rounding to the nearest whole tick. For example, if the bid is 150.03, a market sell order can be filled at 150.03 instead of 150.00, reducing slippage by 0.03.
Algorithmic order routing can also help. Instead of sending the whole order to one liquidity provider, the broker breaks it up and sends parts to multiple providers, seeking the best available price for each portion. This is called smart order routing and is more common in STP/ECN brokers than in market makers.
On your side, you can reduce slippage by using a direct-feed connection to the broker (like a VPN with a nearby server) and by using a wired internet connection instead of WiFi during critical trades. These steps shave off a few milliseconds, which could be the difference between filling at the desired price or after a move.
Conclusion
Slippage and gapping are not bugs; they are features of dynamic, liquid markets. They affect every trader, regardless of asset class, but they are especially relevant to CFD traders because of leverage and the ability to trade on margin. The key to managing them is awareness: know when liquidity and volatility are likely to cause price deviations, use appropriate order types, and always factor in a slippage buffer in your risk calculations.
By trading during liquid hours, avoiding major news events, using limit and stop-limit orders where possible, and choosing a reliable broker, you can reduce the frequency and severity of unfavourable fills. Remember that no strategy eliminates slippage entirely, but disciplined execution can make it a manageable cost rather than a catastrophic surprise.