For those that are new to trading, there is a plethora of trading terminology you’re going to encounter as you navigate your way through the market. One such term is slippage, which refers to the difference between the expected price and actual trade price executed.
Making Sense Of Slippage
In simple terms, when traders place a buy or sell order on an exchange they presume the trade will be completed at that price. Frustratingly, that isn’t always the case and the trade price can differ slightly or significantly, which can be costly. Slippage can be both positive and negative. In the case of buy orders, this equates to a lower price than expected and is considered positive slippage, as the trader receives a better rate than anticipated. And the one you don’t want, negative slippage, is if the actual executed price is higher than the expected price for a buy order. The opposite is true for sell orders.
Given the volatile nature of the cryptocurrency market, slippage is commonplace and traders often have to deal at an unfavourable price due to price movement between the price request and execution of the trade. While slippage isn’t exclusive to cryptocurrencies, it’s a prevailing issue for avid digital currency traders; notably those that trade on DeFi exchanges, which frequently experience high levels of price volatility.
The vast majority of coins listed on DeFi exchanges are low liquidity, low volume altcoins, which relate to other factors affecting slippage. Although there is no cure for low liquidity except more liquidity, there are ways to avoid bearing the brunt of slippage when trading.
How Slippage Can Occur When Trading
No matter how you approach it, cryptocurrency traders are going to be irked by slippage at some point. Too much slippage can be quite detrimental to a traders’ funds, so it’s worth taking measures to minimize the effects of slippage where possible. This is especially important in cryptocurrency markets, where market depth tends to be weaker than in traditional markets. High price volatility has resulted in slippage as a widespread issue among crypto traders.
One must take care when setting their slippage tolerance on a trading platform, set your slippage percentage too low and you might miss out on executing your trade during a price jump or drop. It’s a case of treading a fine line between being too greedy and too conservative. Here’s a short example of how slippage might occur in the crypto market:
- A request for a Bitcoin is placed at $10,000. The order isn’t filled due to insufficient asks at $10,000 to fill a complete order of $100,000. As such, the order is split and filled at new price levels. These levels could remain at $10,000. Alternatively, they could increase to $10,050 or $10,200, meaning the trader would receive an unfavourable purchase as a result of slippage.
Many novice traders aren’t even aware of what’s happening when slippage occurs. So, to avoid unwarranted frustration and financial loss, it’s vital to learn about the currency in question and how to comfortably navigate the trading platform.
Handy Tips For Traders To Avoid Slippage
Traders have always had to cope with slippage. As such, here at MoonXBT we strive to create smart traders by taking appropriate measures to avoid the detrimental effects of negative slippage.
The most common way to avoid slippage is to use limit orders (or, foor MoonXBT, trigger orders) instead of market orders. A trigger order fills at the price requested or better, which differs from a market order that fills the order regardless of negative slippage. Though trigger orders can be risky, as the order only works if the price reaches the set trigger price, meaning traders may miss out on an opportunity due to setting the trigger too low or too high. It’s worth noting that certain exchanges will charge to put a limit (sometimes called a stop, though there are slight differences between the two), so it’s worth investigating how much it is before depositing with the trading platform in question.
We touched on the point of liquidity briefly before, which entails trading when the market is most liquid. This means trading when there is a high trading volume, which is clearly visible on any top-tier exchange, choosing to trade on popular markets or highly popular currency pairs. Also, avoid trading when major news stories break, avoiding the hype that could suddenly affect the price.
The Inescapable slippage is the bane of every trader’s life. Whether you’re buying or selling, traders must account for slippage and take measures to reduce its impact. Experiment with the various avoidance techniques we’ve highlighted and see what works for you.
Risk warning: Trading digital assets involves significant risk and may result in the loss of your invested capital. You should ensure you fully understand the risks involved and consider your level of experience and investment objectives.
MoonXBT Global
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29/10/2021
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