What Is Slippage?
All traders, investors, and crypto enthusiasts who have conducted their own trades in any asset should be aware of slippage… However, this issue becomes even more challenging when trading some cryptos. In brief, slippage is the difference between the expected price of an order and the price when the order actually executes.
Calculating the slippage is essential if you want to limit any potential losses, but it can be difficult when you’re dealing with assets that are as volatile as cryptocurrencies.
So today, let’s find out more about slippage in crypto trading. Let’s get it started!
Slippage in Trading: What Is it?
As already mentioned, slippage refers to the difference between the expected price at which a trade is placed and the actual price at which the trade occurs. Simply put, this happens when an order a trader has placed on a crypto exchange is executed at a different price than the requested one.
There is positive slippage when traders get a better price and negative slippage when they get a worse price than expected. Slight slippage is expected in the crypto market because an asset’s buying and selling prices are constantly changing.
Slippage formula: example
For example, if you want to buy 10 Ether (ETH) but only 8 ETH are available at the price you want, your order will “slip” and fill at a worse price than you were hoping for! To get 10 ETH, you will have to buy 8 at the price you desire and 2 ETH at, unfortunately, a higher price.
There’s even an easy slippage formula. Here it is:
( The Bid Price – Ask Price) / Quantity ) * 100%
The percentage difference between what a trader expected to pay and what they paid for. For example, if a trader bids $100 for an ETH but the transaction filled at $105, the slippage would be -$105 / $100 * 100% = +0.05%.
Why Does Slippage Occur?
Basically, there are only two main reasons for slippage in crypto trading: liquidity and volatility. When the price of a cryptocurrency (most often popular ones like Bitcoin and Ethereum) changes rapidly, it is considered volatile due to how often it trades at different prices.
Regarding volatility, we must remember that cryptocurrencies are still very speculative instruments due to their newness. As a result, all it takes is just one headline and fuzzbuzz to cause a significant increase or decrease in the price of a particular token.
Another reason for slippage in crypto trading is the lack of liquidity. Some cryptocurrencies, altcoins, are not traded frequently due to lack of popularity compared to others like Bitcoin and Ethereum. As a result, the spread between the lowest bid and the highest bid is large, resulting in sudden price changes.
When assets have low liquidity, it means that it is difficult (and sometimes almost impossible) to convert them into cash. Unpopular altcoins are illiquid as there is not always demand for them. This means that they cannot be converted into cash. As a result, low liquidity can lead to significant slippage.
Types of Slippage: Positive and Negative
Slippage is not necessarily something negative. There is also a positive slippage. It happens when a trader pays a lower price than expected because the price dropped just before the order was executed. However, there is a negative slippage when a trader pays a higher price than expected because it rose just before the order was executed. In addition, there is also no slippage at all. This happens when a trader buys an asset at exactly the expected price.
What is slippage tolerance in crypto?
Slippage tolerance occurs when traders try to execute a market order at one price but pay more than expected (or less) due to recent trades made by others. This is a real disappointment for traders and investors as it turns out that the trading platform did not execute what was expected. It is frustrating, especially for novice traders who don’t know what slippage is.
How can you avoid slippage in trading?
First of all, you should remember that slippage is not always something bad as it can also result in better prices on some orders. What is more, there are really some ways to minimize and even avoid slippage when trading cryptocurrencies.
You can use guaranteed stop-loss orders used in the most volatile conditions, limit orders, trade in less volatile markets (however, don’t forget that cryptocurrencies are highly volatile assets), and avoid trading during volatile market events.
How does slippage affect your trading and what can be done?
Since slippage is almost inevitable, you need to consider this in your trading plan (which is important to have when trading cryptocurrencies). Slippage will be counted towards your final trading costs along with other costs such as spreads, fees, and commissions. Therefore, you should look at the slippage you have experienced over a couple of months and use the average slippage when calculating trading costs.
We hope this article will help you understand the slippage issue in crypto trading a little better. While slippage can occur at any time, it is most common in volatile or less liquid markets. So, if you want to avoid the consequences of slippage, it is best to take certain precautions. You can stay away from extremely volatile markets. Also, try to refrain from trading when important economic events occur as they can affect asset prices. And, after all, remember that slippage is not always something negative.
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Disclaimer. This material should not be construed as a basis for making investment decisions or as a recommendation to participate in investment transactions. Trading digital assets may involve significant risks and can result in the loss of invested capital. Therefore, you must ensure that you fully understand the risk involved, consider your level of experience, investment objectives, and seek independent financial advice if necessary.