Slippage refers to the difference between the expected price of a trade and the actual executed price. Even minor discrepancies can significantly impact trading costs and losses.
This article will explore the concept of crypto slippage, explaining what it is, how it works, and how you can use it to your advantage. If you want to master this aspect of trading, this guide is for you.
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Key Takeaways
- Slippage refers to the difference between the expected price of a trade and the actual executed price of the trade.
- More Slippage means more expenses and has an impact on trading costs.
- The types of Slippage are positive and negative slippage
- Slip tolerance specifies the maximum amount of slippage you want to allow when making a trade.
What is Crypto Slippage?
As a trader, you must have heard the word “slippage” as it is a commonly used term in the crypto world.
It is simply the difference between the price at which you want to buy or sell the property and the market price.
For example, let’s say you wanted to buy 1 BTC for $70,000, but a sudden market fluctuation caused the price to rise to $80,000. The fallout in this case would be $10,000.
So in other words, Slippage refers to the difference between the expected price of a trade and the actual executed price of the trade.
Does Slippage Matter?
The importance of slippage in the crypto market depends on your goals. Are you simply observing the market, or are you here to make a profit? Most likely, it's the latter.
If your goal is to profit, then understanding crypto slippage is crucial. Slippage can significantly affect your trading outcomes and could be the difference between success and failure.
For instance, if you place a large market order and the price moves against you before the trade is completed, you might end up with a less favorable price than expected, leading to potential losses. In simple terms, more slippage translates to higher costs, which can eat into your profits and increase your trading expenses. Understanding and managing slippage is essential to minimizing its impact on your trades.
Why does Slippage happen?
Slippage can happen in any trading market but is most likely in markets with low liquidity, high volatility, and low trading volumes, such as cryptocurrencies. Especially in the crypto market, slippage can happen for various reasons e.g.
Low liquidity
Large trades can be difficult to process without affecting the price of the assets in a situation of fewer buyers and sellers. This can result in a higher slippage rate.
High volatility
The crypto market is known for its volatility with prices changing rapidly over a relatively short period. If there is a sudden change in the market value of the asset, this can cause it to fall.
Network congestion
The Blockchain Network can become congested because of high trading traffic making it slow in transaction processing times and potential price changes during the trade.
Order size
The size of the order can affect the result of the slippage. This is like trying to pour a large jug of water into a small funnel – not all of it can go through at once.
For example, Large orders might not be filled at a single price point, especially if the market does not have enough volume to process the trade. This leads to parts of the order being filled at a highly less favorable price.
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Types of Slippage
There are two types of slippage in the trading world and both directly affect your experience.
Positive Slippage:
This happens when a trade is processed at a higher price than the one initially intended. This mostly occurs in a fast-moving market where prices change rapidly. Assume you placed a buy order at $500 for a cryptocurrency but the market volatility, caused the actual order of the market to execute at $450 instead, positive slippage has occurred.
This occurrence is actually to your advantage because it results in increased profit as they effectively enter or exit a position at a better price than expected.
Negative slippage:
Conversely, a negative slippage occurs when a trade is executed at a weaker-than-expected price.
This can result from higher volatility, lower rates, or larger liquidity than the available rates in the market.
For example, you place an asset to sell at $1000 but due to market fluctuations, the order is sold for $980 instead, and negative slippage has occurred. Negative slippage can reduce potential gains or increase losses, especially if reliance is placed on accurate swades.
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How to calculate Slippage
If you have an understanding of what Slippage is, you should have already figured out how to calculate it. It simply considers the difference between the current market price and the actual executed price.
i.e. Slippage = Current Market Value – executed price.
For example, if you placed a buy order for 1 Bitcoin at $12,000 and it was filled at $10,000, then your slippage would be $2000 (12,000-10,000). In this case, you received a lower price than expected due to slippage.
The Slippage percentage can also be calculated by subtracting the current market price and the executed trade price and dividing it by the current market price.
i.e. Slippage Percentage = (Current Market Price – Executed Trade Price) / Current Market Price.
For example, if you placed a buy order for 1 Bitcoin at $12,000 and it was filled at $10,000, then your slippage would be $2000 (12,000-10,000). The slippage percentage, in this case, would be 16% (2000/12,000). This means that you received a lower price than expected. This makes traders use tools and resources to help them calculate slippage.
Many cryptocurrency trading platforms offer slip calculators that allow users to input their trading parameters and calculate expected slippage such as online slippage calculators that use live market data to calculate estimated slippage in trades that can provide insight into potential risks associated with trading before full participation.
Methods for reducing Slippage
From observation, slippage has a lot of effect on you as a trader it holds sway to the probability of profits and losses. It cannot be avoided but it can be managed or reduced using some strategies such as
Limit Orders
This is one of the best ways to reduce falls. By issuing a limit order, traders can specify a buy or sell price, and only when the price is reached will the order be executed. This gives you what you expect and helps you avoid unwanted losses
Stop loss orders
By establishing a hard stop loss, the potential for slippage can be reduced by limiting how far the price can go before the order is executed. This gives you control of your trade and reduces costly slippage losses.
Monitoring the Market Conditions
Losses can also be limited by monitoring market conditions. By watching news and events that could affect the market, you can adjust your order according to the information you get avoiding sudden price changes and potential losses.
Trusted Exchange
Using a trusted and reliable exchange can reduce your slippage losses. Trusted exchanges offer high liquidity, low fees, and fast order execution times, which contributes to reducing the impact of slippage on trades.
Liquidity
Finally, another factor in reducing slippage is liquidity. Liquidity refers to how easily a trade can be executed without affecting the price of the asset.
Higher levels of liquidity usually result in lower slippage because trades are more likely to quickly execute especially at a fair price. As such, you should ensure that an exchange that offers good liquidity is used to reduce slippage.
Slippage Tolerance
This article would be incomplete without a discussion of slip tolerance. Specifies the maximum amount of slippage you want to allow when making a trade. It is important to consider in order to balance the benefits of trading against the risk of high slip rates.
For example, if you set a slip tolerance of 1%, you may want to accept a difference of up to 1% between the standard trade value and the executed trade value. If the slip rate goes beyond this point, the trade will not be executed.
It is important to establish slippage tolerance as a form of risk management in trading, it protects you from market fluctuations.
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Conclusion
As profitable as one can be from cryptocurrency trading, it comes with its own set of risks, and slippage is a key factor in determining its success or failure. However, this problem can be mitigated by understanding how it works, allowing you to benefit from successful trades while protecting yourself from losses.
To ensure successful trades and minimize the risk of slippage, it is essential to understand and apply strategies such as using limit orders and choosing trading pairs with high liquidity. These approaches will help you navigate the volatile market with greater confidence and increase your potential for significant gains.
FAQs (Frequently Asked Questions)
What is crypto slippage?
Crypto Slippage occurs when the price of a cryptocurrency changes between the time you place an order and when it is executed, leading to a final price that differs from what you initially expected.
Slippage occurs due to rapid price changes in the market, often triggered by factors such as high volatility, low liquidity, or sudden spikes in trading volume. When these conditions are present, the price of a cryptocurrency can shift between the time an order is placed and when it is executed, resulting in a different final price than originally anticipated.
Slippage is calculated by comparing the expected price of a trade to the actual price at which the trade is executed. The difference between these two values represents the amount of slippage experienced in the transaction.
Slippage can significantly impact traders by causing them to have their trades executed at a price different than expected. This can lead to unexpected losses or reduce the profitability of a trade. For example, if the market moves unfavorably before an order is executed, a trader might end up paying more to buy or receiving less when selling than originally planned. Over time, frequent slippage can erode a trader's overall returns, making it a critical factor to manage, especially in highly volatile or low-liquidity markets.
Some exchanges or brokers may charge an additional fee specifically for slippage, while others might incorporate the cost of slippage into the overall trading fees or spread. It’s important to review the fee structure of your trading platform to understand how slippage is handled and whether any extra costs apply.
