Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed. It can occur in any market but is particularly prevalent in cryptocurrency due to its high volatility and varying liquidity across exchanges and trading pairs.
Why Does Slippage Happen?
Several factors contribute to slippage:
- Market Volatility: Prices can change rapidly between the time you place an order and when it's executed.
- Order Size: Large orders can sometimes exhaust the available liquidity at a certain price point, forcing the trade to be filled at less favorable prices.
- Liquidity: Markets with low liquidity are more prone to slippage, as there are fewer buyers and sellers to absorb large orders without significant price impact.
Types of Slippage
Positive Slippage: Occurs when the trade executes at a better price than expected. This is favorable for the trader.
Negative Slippage: Occurs when the trade executes at a worse price than expected. This is unfavorable and more commonly discussed.
How to Manage Slippage
- Use Limit Orders: Unlike market orders, limit orders allow you to set a specific price at which your trade should execute. If the price moves beyond your limit, the order won't fill, protecting you from negative slippage.
- Trade on High-Liquidity Exchanges: Exchanges with higher trading volumes and deeper order books generally experience less slippage.
- Break Down Large Orders: Splitting large trades into smaller chunks can reduce their market impact.
- Check Slippage Tolerance Settings: Some decentralized exchanges (DEXs) allow you to set a slippage tolerance, which defines the maximum percentage of price movement you're willing to accept.
Understanding and accounting for slippage is crucial for effective risk management in cryptocurrency trading. Our Crypto Profit Calculator helps you factor in potential slippage to get a more accurate picture of your trade outcomes.