- Slippage is the difference between a cryptocurrency’s expected and executed trade prices.
- Traders can follow some strategies to minimize the impact of negative slippage in crypto trades.
- The slippage tolerance feature helps in mitigating crypto slippage.
Traders often encounter unexpected challenges in the dynamic world of cryptocurrencies. Prices of tokens fluctuate in the blink of an eye.
One such challenge can significantly impact the outcomes of your crypto trades. Slippage significantly impacts crypto trading outcomes.
It happens when the price at which a crypto trade is completed differs from the expected price. Slippage happens due to different reasons, such as rapid price movements.
Cryptocurrency prices tend to fall unpredictably in a bear market. This increased volatility can lead to higher slippage.
Understanding this concept is crucial for optimizing your trading strategy. In this article, we will tell you about the intricacies of slippage. Also, check the strategies to minimize its impact on crypto trades:
Understanding Crypto Slippage
Many crypto investors have been facing slippage in crypto trading for a long time. This occurs when you purchase a cryptocurrency at a specific price, filling the order at a different price than anticipated.
It is the discrepancy between the predicted price of a cryptocurrency trade and the actual executed price.
Also, it is often defined as a percentage. Slippage happens due to market volatility, liquidity, and network congestion. Sometimes, crypto traders have to bear random costs due to this slippage.
These additional costs can lower your trading profitability. Consistent slippage makes it more challenging to execute trades effectively.
It can be both positive and negative for the investors. Many traders use the slippage tolerance setting when trading through a cryptocurrency exchange.
The excellent level of slippage tolerance in cryptocurrency trading differs. It depends on all traders’ comfort with risk.
Many crypto exchanges typically set a default rate of 0.5%. All investors should set their slippage tolerance according to their risk preference before beginning any crypto trade.
Key Factors Influencing Slippage
Some factors cause slippage in crypto trades. Below, you can find the factors responsible for this occurrence:
- Market Volatility
It takes less time for the price of cryptocurrencies to fluctuate. This volatility causes slippage if the price of an asset changes suddenly while a trade is being executed.
- Liquidity
Many times, there are fewer buyers and sellers for a cryptocurrency. So, trades took place with larger price gaps due to low liquidity. It results in a higher slippage rate in trades.
- Order Size
Large orders can experience slippage because they may not be filled at the desired price. It can cause the remaining portion to be executed at different prices.
- Network Congestion
Network congestion is another reason for crypto slippage. It happens when a blockchain network becomes congested during high trading volume.
The network starts processing transactions slowly, and potential price changes while crypto trades are executed.
Types of Slippage
There are two main types of slippage that traders can encounter in crypto trading:
- Positive Slippage
Positive slippage occurs when the executed price of a crypto trade is better than the expected price. This type of slippage leads to more profits. A trader enters the market at a more favorable price than anticipated.
For example, if you place a buy order at $100 and it gets executed at $98, you benefit from positive slippage.
- Negative Slippage
Negative slippage happens when the trading price is worse than expected. This type of slippage leads to losses in trades.
For example, if you place a buy order at $100 and it gets executed at $102, you experience negative slippage. Negative slippage often occurs due to high volatility and low liquidity in the crypto market.
Calculating Slippage in Crypto Trades
The process to calculate slippage in a crypto trade is very simple. A trader can determine slippage by getting the difference between the expected price and the actual executed price. The formula for calculating slippage in crypto is:
Slippage = ((Executed Price – Expected Price) / Expected Price) x 100
For example, if you expected to buy a cryptocurrency at $100 but the trade was executed at $102. Then, the slippage would be:
Slippage = ((102-100) / 100) x 100 = 2%.
Setting Slippage Tolerance
Many crypto trading platforms let you set a slippage tolerance percentage to avoid losses. Your trade will only execute if the price stays within your acceptable range. This feature is suitable for trading in the volatile crypto markets.
For example, suppose you set a slippage tolerance of 1% and place an order to buy Bitcoin at $100. Your trade will only be executed if the final purchase price is within $99 to $101. The trade will not be executed if the price shifts beyond this range.
Slippage tolerance helps you control the price at which your trades are executed. You can prevent unexpected trading costs easily through this feature. Also, it will allow you to improve your crypto trading strategy as trades will execute within acceptable price ranges.
Disclaimer
The information in this article is for educational purposes only. Cryptocurrency trading involves significant risk. It is recommended to conduct thorough research. Also, you can consult with a qualified financial advisor. The author is not responsible for any financial losses incurred as a result of using the information in this article.
