By reading this article, you will learn what slippage is, how to stay protected against it, and how you can minimize the risk of falling victim to it in the future.
The Definition Of Slippage In Crypto
When you place an order on the crypto exchange market, you expect that the order will be filled at the given bid rate, but by the time the broker receives the order, the rate at which you bought it could have changed.
That means that the broker will then follow the current price of the order when they fill it which can either increase or decrease the buying power of the order.
Here is an example. Someone places an order for a Widget coin with 100 units costing $12, therefore they are expecting to pay $1,200 for it.
But the price increases to $12.50 before the order is able to go through, and therefore, instead of buying 100 units for $12, the order turns out to be £1,250 for 100 units.
This is slippage, and when it happens orders are executed at the next best price, and for large crypto orders, it can result in getting units at multiple different rates.
Another example of this is when 1,000 units are bought for $10 at a time when volatility is high, it could result in you paying $10 for some of the units, $10.5 for the other units, and so on.
When the order is large and the volatility is high, there is a bigger chance of slippage happening.
Positive And Negative Slippage
There is positive and negative slippage and positive slippage is when the crypto price falls and makes your buying power increase. But negative slippage is when the price of crypto increases and reduces your buying power.
It is usually in very small increments that slippage occurs with a range of about 0.05% to 0.10% being the most common.
However, in some highly volatile circumstances, the slippage might become greater and have a range of 0.50% to 1%, to make it clearer as to how this translates to real money, we will include another example.
Imagine that you are trading ADA, which is around $2 per unit, having a slippage of $10 doesn’t sound that bad when you are trading $1000 in ADA, but if you are trading a larger amount such as $100,000, the slippage of $1000 can represent 500 units.
Is Slippage Common In Crypto?
In any market, slippage could happen, but it is most likely to happen in crypto markets which is because of the extreme volatility that the cryptocurrencies experience.
Every hour, there are tens and thousands of transactions being made and these cryptocurrencies fluctuate pretty much constantly so by the time an investor submits an order and the broker then fills it, it is highly likely that the bid-ask spread has already changed, even multiple times.
As well as demand, slippage is also affected by the fact that they do not have a reference price and are only worth what someone is willing to buy them for and what they will then be sold for which makes the bid-ask unstable.
With the high demand for blockchain assets and high volatility of crypto, slippage is pretty much unavoidable and is simply part of the investing process.
However, knowing what slippage is and how it controls your buying power will give you an advantage in becoming a smarter investor.
Controlling Slippage When Trading
Even though slippage is hard to avoid, it can still be very frustrating especially if you are new to the world of crypto trading and investing.
Do not lose hope though because there are ways that you can get better control of it, all you have to do is set your slippage tolerance.
Control of slippage tolerance is offered by crypto brokers as part of their market order system. It allows investors to set the level of how much slippage they are willing to incorporate which can be either positive or negative slippage.
Then, with this tolerance set, the broker will only fill out the orders that are set within the boundaries of tolerance. If the price or liquidity goes beyond the tolerance threshold, then the order will not be filled.
In order to protect themselves from instability on any trading day, most people set their tolerance at 0.10% or less.
There is another way to help minimize slippage which is to not trade during periods of high volatility even if it is easier said than done.
It is quite rare for trading to be slow, but during the afternoon or Tuesdays and Wednesdays, the market will be less volatile, and you will have less of a chance of experiencing slippage if you trade during these times.
But even then, you should still have a tolerance set during these times as the market can still be a bit unpredictable.
Another way that you can help avoid slippage is to use a conditional trade known as stop-limit orders. This means that the trade will only go through if it meets all of your conditions.
Both stop-limit orders and limit orders avoid the effects of slippage, these strategies are not completely guaranteed buys, and you may lose stock that you had your eye on due to it not being the right price.
As well as this, slippage can also affect the owner of the stock and will therefore work in their favor or work against you if your stock is losing value or the slippage is negative.
You could also try using stop-loss orders which will prevent major problems that a holder may suffer from.
A stop-loss order is when the price is set and signals the sale of the stock straight away so for example, if the stock drops below $5, it will be sold. This stop-loss order technique also avoids holding on to stocks that are losing.
There are multiple different things that cause slippage, with the greater orders suffering more of a blow than small ones.
If you are running into slippage now and then when you are trading, do not worry too much about it as it is a normal part of trading and investing crypto.
There are ways that you can help avoid it and even make it work with you instead of against you if you put into practice the different strategies that we covered.
If you enjoyed this article, you might enjoy our post on ‘What Does Minting An NFT Mean?‘.