Simply put, slippage is when a market participant does not receive an execution price that was expected. In other words, trade orders are not consistently executed at the exact price you want. Sometimes the order can perform at a higher price, and others are run at a lower price.
What Triggers Slippage?
If you trade in the market, you expect a traded asset to be bought or sold at a specific price. However, when slippage happens, you must accept a price different from your request. Slippage can occur during the time between order placement and execution.
Slippage can be triggered mainly for the following reasons:
- High spread. The difference between the bid and ask prices and the low volume of the crypto in the order book can trigger slippage.
- Low level of liquidity in the market. Some assets (exotic currencies or some digital ones) are rarely traded, making them vulnerable to slippage.
- High volatility of prices. The crypto market is known for its instability, so the crypto assets are incredibly prone to slippage.
- Such aspects as demand and supply balance, market sentiments, overall enthusiasm of market participants, and government restrictions can impact the price of cryptos, possibly triggering slippage.
Depending on how the slippage affects your orders, it can be beneficial or damaging.
Slippage doesn’t always lead to inevitable loss. You can profit from positive slippage since your order is executed at a lower price than the one you placed first. For example, with positive slippage, you can fulfil a buy order at a lower price than you asked; in this case, you are in a stronger position, which allows you to get a higher buying rate and make more money.
A negative slippage can occur when the pricing adjustment leads to a lower price for your asset than you originally bought. For instance, you want to sell one DOGE for $5, but the order is fulfilled at $3.6, that is, at a lower price.
How To Control Slippage?
Although slippage might become a major issue for the trader, it is possible to manage it.
You may, for instance, only deal in highly liquid assets or steer clear of risky markets. However, not every trader will agree that these strategies are appropriate.
Most cryptocurrency traders also use the practise of establishing a slippage tolerance threshold.
The ST is the amount an order may move to the trader’s disadvantage before the order is cancelled. By establishing an ST, you are agreeing to a price swing of that %, either up or down.
To protect themselves from large price swings, exchanges often give traders the slippage tolerance (ST) option.
If you choose a slippage tolerance value of 5%, the assets you get will not be more than 5% of that amount.
If the slippage tolerance is sufficiently high, the deal will go through even if the price fluctuates widely. However, this opens the door for sandwich and front-running assaults.
If the slippage tolerance is too low, the transaction may be reversed if the price fluctuates by more than the predetermined margin.
How To Prevent Slippage?
Slippage can lead to a significant loss of funds, especially in short-term trading.
There are different ways to minimise losses and reduce the effect of slippage on your trading.
Slippage may be avoided by refraining from trading during volatile market times. Slippages may appear unavoidable if you engage in trading in extremely volatile markets like crypto. Slippage may be reduced only if trading is done at the most stable times.
The usage of limit orders is a further possibility. When traders utilise a market order, slippage often happens. Use limit orders to cut down on losses. Limit orders, in contrast to market orders, ensure that the trade will be completed at your chosen price. However, it is crucial to keep in mind that the limit order may not be fulfilled.
Finally, trading highly liquid assets is one way to prevent slippage. Investing in liquid assets may reduce the slippage impact on your transactions.