Chartered Market Technician (CMT) Practice Exam 2025 – Your All-in-One Guide to Exam Success!

Slippage is primarily attributed to liquidity risk, which refers to the potential for an investor to incur a loss when executing a trade due to insufficient market activity. This can occur when there are not enough buy or sell orders at the desired price level, leading to a situation where the trade must be executed at a less favorable price.

For example, in a thinly traded stock or during periods of high volatility, a trader may place an order expecting to buy at a specific price, but due to a lack of available orders at that price, the order gets filled at a different, often less favorable price. This is particularly pronounced in markets where liquidity is low, causing greater price swings for large orders or during times of sudden market movements.

Understanding liquidity risk is crucial for market participants, as it helps them make informed decisions about when and how to execute trades to minimize slippage. Recognizing the impact of liquidity on trade execution enables traders to implement strategies that account for potential slippage, thereby enhancing their overall trading performance.