When trading crypto, you must have noticed that when you place trade orders, they do not consistently execute at the exact price you desire. Sometimes, the order may execute at a higher price, and another time, it may be lower. This occurrence is called price slippage.
Trade slippage is very common among crypto trading beginners. It is prevalent when buying and selling cryptocurrencies.
Understanding how slippage works can make you a more profitable trader.
What is Slippage in Crypto?
Slippage is the difference between a trade's expected and actual prices. It happens when traders buy or sell their assets for more or less than the expected price.
When trading, you have a specific price in mind for buying or selling. However, because the market moves fast, the price can change when your order enters and when the trade is completed. This can result in you buying or selling at a higher or lower price than you wanted.
How does Slippage Work?
During the delay between when a trade is initiated and when it's completed, three possible outcomes could occur:
Positive Slippage- Positive slippage has an advantage for the trader in the market as the execution of their order happens at a better price than the placed one. Let us take, for instance, if you carry out a buy order and it executes at a lower price than the order, it puts you in a better condition, giving you a better buying rate and an opportunity to make more money.
Negative Slippage- For a buy order, slippage is negative when the actual price is higher than expected, giving traders an unfavorable buying rate. Slippage is negative for a sell order when the actual cost is lower than expected, causing traders to incur losses.
Neutral Slippage- This happens only when one submits their order and is filled at the exact price one had in mind when entering.
Example: Suppose you intend to buy $Sol at $20.00 on a crypto exchange. You place your order, but when it is finalized, you realize that it has been filed at a higher price of $20.50.
This is an example of negative slippage because you bought an order at a higher price than you intended.
On the other hand, positive slippage happens when you place a buy order for $Sol at US$20.00 but finalize it at only US$19.50. The lower price increases your purchasing power.
Causes of Slippage
There are buyers and sellers in every market. There must be sufficient buyers and an equal number of sellers for the perfect order to be executed. If there's an imbalance, prices will fluctuate, leading to slippage.
An asset with low liquidity will always have a higher slippage percentage.
Avoiding and Minimizing Slippage
Slippage happens to every trader. There may not be a way to 100% guarantee your order will be executed at your desired price, but there are ways to minimize its effects.
They include:
Use trading platforms with slippage tolerance controls. Slippage tolerance refers to the difference between the price you execute an order and the actual price at which the order will be filled that you are willing to accept.
Use order types that limit slippage, such as limit order and stop-limit order.
Trade during active hours only.
Avoid trading before significant announcements and events.
Invest in popular assets that have high liquidity.
Final Thoughts
Slippage is common in crypto trading. There may not be ways to avoid it entirely, but you can use best practices to minimize the impact.
Therefore, understanding the concept of slippage and slippage tolerance in crypto will help you execute better trading strategies.
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