Slippage

What Is a Slippage?

Slippage is a term used for describing prices changing from when the order was placed to when it was fulfilled. 

When a trader places a buy or sell order on an exchange, they usually expect their order to be finalized at the same price they chose. However, slippage occurs in highly volatile markets, as prices continuously change. Therefore, the price changes in the time frame between order placement and its fulfillment. 

For example, a trader places an order for ETH at a price of $ 10.4. However, by the time the order reaches the exchange, the price has risen to $11.5.  This means that the trader has to accept and execute at this price.

Slippage can happen in all markets, stocks, forex, and commodities. However, it is much more common in crypto markets due to their higher price volatility, low volumes, the slower processing capacity of networks, and liquidity issues. In addition, decentralized exchanges are usually more prone to slippage. 

Types of Slippage

Slippage can be positive and negative. If the trade's executed price is lower, it is called positive slippage. Since the lower price benefits traders, it is seen as positive. If the price is higher when the trade is executed, the trader gets a worse rate than anticipated, so the slippage is seen as unfavorable. The reverse applies to sell orders. Higher prices than expected for sellers mean positive slippage, while lower prices than anticipated are negative slippage. 

Having too many trades executed with slippage can be bad for traders because they lose their strategy due to price variations. To reduce slippage or even eliminate it, traders can opt to use limit orders and not market orders. Limit orders can help eliminate slippage as they do not settle for differing prices and are preset into the order books. 

Traders can also set their slippage tolerance to a low threshold, as most exchanges offer a range between 0.1% to 5%. However, keeping this setting at the extreme bottom can leave them with no execution and missed opportunities. On the other hand, keeping it too high can mean that traders become victims of market manipulations. 

Slippage can be a frustrating element of the market, especially for a less practiced trader. Therefore, it is essential to understand and assess the trading platforms' volatility and the cryptocurrency they are trading in.