Slippage: All You Need to Know
Discover slippage in trading & how to tackle it. Causes, impact on the crypto market, and tips to mitigate. Keep slippage low for the best execution price.
Slippage is the difference between the expected price of a trade and the actual execution price. This phenomenon can occur at any time, although it is more common during periods of high volatility when market orders are used.
Slippage can also occur when a large order is completed and there is an insufficient volume at the targeted price to keep up the present bid/ask spread.
How does slippage occur?
The availability of liquidity, or the capacity to buy and sell an item quickly without affecting the market price, is the fundamental component that causes slippage. As a result, when market liquidity or trading activity for a specific asset is low, the rate of slippage tends to rise.
Slippage may occur as a result of rapid market price movements, causing a delay between order placement and execution. Despite the fact that the phrase is extensively utilized in numerous market arenas, the definitions remain consistent. Yet, the circumstances that cause slippage vary across different settings.
Slippage and cryptocurrencies
Slippage is also quite prevalent among cryptocurrency traders, especially for beginners who have just gotten started. When you trade, you have a predetermined price in mind at which to buy or sell.
The price, however, may change between the time your order enters the market and the time the trade is closed because the cryptocurrency market is volatile.
Hence, you can find yourself buying or selling at a price that is higher or lower than what you had anticipated. Slippage is also quite common for cryptocurrencies with smaller market caps and inadequate liquidity.
How to tackle exposure to slippage?
Choosing exchanges with high liquidity
Given that slippage often occurs when market volatility is high and liquidity is scarce, trading on exchanges with insufficient liquidity may increase one's susceptibility to slippage.
Managing slippage tolerance
Slippage tolerance is the maximum allowable percentage difference between an order's intended and executed prices, after which the order is cancelled or revoked.
Keeping maximum slippage low
Maintain little slippage, between 0.5% and 2%, to prevent front-runners. Keep your slippage on the lower keel if you are going to place a big order.
How does slippage impact algorithmic trading?
Slippage can impact algorithmic trading by causing delays in order execution and affecting the accuracy of price predictions, which can lead to reduced profits.
What is slippage tolerance?
Slippage tolerance is the maximum allowable percentage difference between an order's intended and executed prices, after which the order is canceled or revoked.
Why does slippage occur more during periods of high volatility?
Slippage occurs more during periods of high volatility because traders use market orders, which can lead to large price fluctuations and delays in order execution.