Slippage is common when trading crypto on decentralised exchanges (DEXs) and centralised exchanges (CEXs). If you’ve encountered this term but don’t know what it means or what it does, we’re here to help.
In this article, we’ll discuss what is slippage in cryptocurrency, what causes it, and how to avoid negative slippage to help you make informed decisions on your crypto trading journey.
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What Is the Definition of Slippage?
Slippage refers to the difference between the expected price of a trade and its actual executed price. When you place an order to buy or sell a cryptocurrency, the trade will be executed on an exchange. The execution price will be determined by the available liquidity in the market at that moment.
Two Categories of Slippage
Some users think what is slippage in crypto is always a negative thing, but it’s not really the case. In fact, slippage can be both positive and negative.
1. Positive Slippage
Positive slippage is a favorable outcome for traders, as it means their orders are executed at a better price than anticipated. When you’re buying, this means that the ask price is lower, and if you’re selling, the bid price is higher. Positive slippage can happen during times of high demand or when prices surge and orders get filled quickly. Positive slippage has the potential to increase profits and maximise returns.
2. Negative Slippage
On the other hand, negative slippage is when orders are executed at an unfavourable price. This may result in losses and thus must be carefully considered when entering any position. Negative slippage may occur when liquidity is low or there’s low trading activity in the market.
What Is Slippage Percentage?
Slippage percentage is a measure that indicates the extent to which the price of a coin or token has changed. It helps you assess the movement in price during the execution of a trade.
Main Causes of Slippage in Crypto
There are several reasons why a slippage occurs in the crypto market. These may include, but are not limited to, the following:
1. Market Volatility
The crypto market is volatile, with sudden price fluctuations happening frequently. Many factors can lead to a bull or bear market—economic conditions, market optimism or pessimism, user psychology, and technological advancements, among others.
Therefore, the price of a cryptocurrency can change rapidly between the time a trade is placed and when it is executed. This volatility can significantly impact the executed price, and cause slippage.
2. Order Size & Liquidity
The size of the trade plays a role in slippage. Larger trades require more liquidity to be filled at a specific price. If the order book does not have enough buy or sell orders to match the size of the trade, slippage can occur as the market adjusts to accommodate the transaction.
How to Avoid Negative Slippage in Cryptocurrency
It’s good to note that because of the crypto market’s volatility, it may be impossible to completely avoid slippage. However, there are some strategies you can do to limit your exposure to negative slippage, or at least minimise losses.
Disclaimer: Not financial advice
1. Choose High-Liquidity Cryptocurrencies
It can be tempting to invest in newly created, lower-priced cryptocurrencies as they may offer higher earning opportunities in the short term. However, many of these cryptocurrencies have low trading volumes, which can be prone to negative slippage.
Instead, you may focus on trading cryptocurrencies with high liquidity to reduce the likelihood of negative slippage. Some examples of high-liquidity cryptocurrencies include Bitcoin (BTC), Ethereum (ETH), Tether (USDT), and Binance Coin (BNB).
2. Opt for Limit Orders Instead of Market Orders
One trick to eliminate negative slippage is using limit orders instead of market orders. With a limit order, you can set a specific price at which you want your trade to be executed in the future. On the other hand, a market order is executed immediately at the current market price.
The only downside with limit orders is that there is no guarantee that the price of a specific cryptocurrency will reach your limit order price. At the end of the day, it’s important to assess the market conditions and determine if using limit orders aligns with your trading strategy.
3. Keep an Eye on Crypto News and Events
The crypto market tends to experience higher volatility when there is big news related to the market or economy, or when major crypto-related events are happening. And as discussed, volatility is a major contributing factor to slippage.
Although some traders may benefit from positive slippage during volatile periods, negative slippage is also a possibility. It is advisable to stay updated on crypto news and events before placing trades to help you assess whether you’re more likely to encounter negative or positive slippage. You can easily monitor news through platforms like Twitter and crypto blogs.
Conclusion
Positive and negative slippage exist in the crypto market due to various factors. It’s best to take slippage into account when executing trades to avoid huge losses. You can employ risk management strategies like using limit orders instead of market orders, using high-liquidity cryptocurrencies, or utilising trading tools that offer slippage protection to mitigate the potential negative impact of slippage on your crypto journey.
FAQ
How much slippage should I set?
Setting a slippage percentage is a personal decision based on your risk appetite and trading goals. Experimentation and adjustments may be necessary to find the slippage percentage that best suits your trading preferences and objectives.
For instance, you may start with a conservative percentage to minimise potential losses. However, if you’ve realised you’re willing to accept a slightly higher slippage in exchange for greater trading speed and execution, you may proceed with a higher percentage .
Be sure to conduct thorough research, monitor market trends, and stay updated with relevant news to make informed decisions about your slippage settings.
Is slippage positive or negative?
Slippage can be positive or negative. It’s considered positive slippage when an order is executed at a better price than expected, which may lead to positive returns. Meanwhile, negative slippage occurs when an order is executed at a worse price, which may lead to losses.
How do you beat slippage?
Some strategies you may use to avoid negative slippage or at least minimise losses include monitoring market liquidity, using limit orders instead of market orders, avoiding trading during periods of high volatility, etc.
