What Is Slippage?
Slippage is a common issue in cryptocurrency trading where the execution price of an order differs from the expected price at the time of placing the order.
It occurs when there is a movement in the market price between order placement and trade execution.
Slippage is particularly prevalent and more pronounced in crypto markets due to their high volatility and lower liquidity.
There are Two Types of Slippage
- Positive: Positive slippage occurs when the executed price is better than the expected price for a buy order or worse for a sell order. This gives traders a more favorable rate than they intended.
- Negative: negative slippage happens when the executed price is worse than the expected price for a buy order or better for a sell order, resulting in a less favorable rate for traders.
Excessive slippage can lead to significant financial losses for frequent traders.
To mitigate slippage, traders can opt for limit orders instead of market orders.
Limit orders allow traders to set a specific price they are willing to buy or sell, ensuring they do not settle for an unfavorable price.
Slippage Tolerance
However, it’s important to find the right balance when setting slippage tolerance.
Setting it too low may result in missed opportunities, as transactions may not execute during significant price movements.
Setting it too high may make traders vulnerable to frontrunning, where others take advantage of their orders by executing similar orders at a more favorable price before them.
Slippage can be challenging for less experienced traders, so it’s crucial to understand the volatility of the cryptocurrency and the specific trading platform being used.