Slippage is the difference in price between the time the order enters the market and when it gets executed. Slippage occurs in the markets for different assets, including the leading digital asset – cryptocurrencies. Such price difference usually means that investors lose money because buy or sell amounts have changed dramatically by the time the trade finished.
In today’s blog post, CoinCasso will discuss what slippage is, when a slippage happens, and how a trader can avoid slippage during trading.
Slippage happens when the actual price that traders receive, differs from the one they requested. This phenomenon is crucial to understand for cryptocurrency investors as the coin prices are volatile.
In order to sell or buy cryptocurrency, traders need to create market orders or limit orders. The first ones have more chances to be executed faster because trade happens at the best current available market price. Unlike limit orders, a market order has no limitations regarding a buy or sell price. That is why the results of the trade with market orders can be totally unpredictable if the prices increase or decrease rapidly. With a limit order, a trade executes only within a selected price range. On the one hand, it’s more secure in terms of saving money. On the other hand, limit orders are less likely to be finished, especially if you’re trading an unpopular coin.
Slippage occurs when the final price of the trade is different from what a trader expected. This can be both when they make and lose money after executing orders. An example: a trader was willing to buy some coin at a price of $1000, with the limit price being $1500. The transaction wasn’t finished until the coin’s value reached $1300. Consequently, the slippage here is $300. Two major factors that add to slippage are volatility and liquidity.
It’s a platform feature that allows to execute orders with the filled-in maximum and minimum slippage percentage. As an example, one can set up slippage tolerance on some exchange platforms. With such pre-filled limits, a trade doesn’t happen if the slippage percentage is higher or lower. To put it simply, such framing prevents traders from losing money if slippage goes negative.
Slippage does not necessarily mean losing money. There are two types of slippage: positive and negative.
The definition of slippage in crypto goes as follows: slippage happens when the expected price of order changes before the execution. This phenomenon is not a rare thing in cryptocurrency, because these digital assets are highly volatile (for example, Bitcoin). Because of high volatility, the value of some coins goes up and down numerous times per day, which, in its turn, affects at what prices orders are executed.
Crypto volatility means that it's almost impossible to predict ups and downs in coins' pricing, and every trader needs to accept this fact before making any investment. No wonder that slippage can turn the tables both for large and smaller investors. Unfortunately, there are no ways to control or prevent slippage when it happens. However, you can still use some tools to limit slippage and minimize risks. Some large cryptocurrency exchanges displace show warnings beginning from 2% slippage. For instance, you can manually fill in the slippage minimum and maximum percentages for trade. This feature is called slippage tolerance. In such a way, you cannot lose or gain more than, let's say, 10% (if that's the percentage you've chosen).
There's not much one can do here because slippage occurs due to high volatility levels in the cryptocurrency market. To protect yourself from rapid changes in prices, it's better to go for limit orders rather than market ones. Without a doubt, a market order may seem to be safer because they will be finished for sure. With a limit order, on the contrary, one can set up the maximum price they're ready to buy and sell at. As a result, no matter what the price movement is, you will be safe within the chosen limits.
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