What Is Slippage In Crypto?

Crypto trading is much more than buying a token at a lower price and selling it for a higher price. Given the volatility of digital assets, traders might often face significant complexities when executing orders. Understanding the nuances is crucial for success.

One such crucial concept is slippage. Knowing what slippage is and how it affects trading can make a significant difference.

Key takeaways

• Slippage definition: Difference between expected and actual trade price in crypto trading.
• Types of slippage: Positive, negative, and neutral slippage impact trading outcomes.
• Key factors: Market volatility, liquidity, order size, and trading times affect slippage.
• Calculation: [(Execution Price – Expected Price) / Expected Price] * 100.
• High slippage impact: Leads to financial losses and disrupts trading strategies.
• Minimizing slippage: Use limit orders, trade during low volatility, execute smaller orders, and use slippage bots.

What is slippage?

Slippage means difference between the expected price of a trade and the actual price at which it is executed. This phenomenon occurs in all financial markets, including crypto.

When a trader places an order, they expect it to be executed at a certain price. However, due to market fluctuations, the actual execution price can be higher or lower. This difference is what we call slippage.

Slippage can happen for various reasons. Market volatility, low liquidity, and large order sizes are the main culprits. Understanding these factors helps traders better anticipate and manage slippage.

Imagine a trader wanting to buy Ethereum. They see the current price is $2,000 and place a market order expecting to buy at this price. Due to a sudden surge in demand, the order executes at $2,010. Here, the trader experiences $10 of negative slippage.

On the other hand, suppose the same trader wants to sell Ethereum at $2,000. They place a market order, and just as the order goes through, the price unexpectedly rises to $2,015. The order is executed at a higher price, giving the trader $15 for positive slippage.

In highly volatile markets, like during major news events, slippage is more pronounced. Prices can swing widely between the time an order is placed and when it’s executed. For instance, if a significant regulatory announcement affects the crypto market, prices might shift dramatically, causing notable slippage.

Types of slippage

Slippage can be positive, negative, or neutral. Each type has different implications for traders.

Positive slippage

Positive slippage occurs when the execution price is better than the expected price. For example, if a trader expects to buy Bitcoin at $30,000 but the order executes at $29,950, the trader benefits from positive slippage. This outcome, while rare, is always welcome.

Negative slippage

Negative slippage happens when the execution price is worse than the expected price. For instance, if a trader expects to buy Bitcoin at $30,000 but the order executes at $30,050, they experience negative slippage. Negative slippage is more common and can impact trading strategies significantly.

Neutral slippage

Neutral slippage means there is no difference between the expected and execution prices. This scenario is ideal but not always achievable, especially in highly volatile markets.
Understanding these types helps traders prepare for potential outcomes and adjust their strategies accordingly.

Key factors that affect slippage

Several key factors influence slippage in crypto trading. Knowing these can help traders minimize its impact.

• Market volatility: High volatility means prices change rapidly within a short period. In such conditions, the price at the time of placing an order can differ significantly from the execution price, leading to slippage.
• Liquidity: Liquidity refers to how easily an asset can be bought or sold without affecting its price. Low liquidity often results in higher slippage because there aren’t enough buyers or sellers to match the order at the expected price.
• Order size: The size of the order also affects slippage. Large orders are more likely to experience slippage because they require more significant market activity to fill. Breaking down large orders into smaller ones can help reduce slippage.
• Trading times: Certain times of the day or week see higher trading volumes and volatility. For example, trading during major financial market openings can lead to more slippage due to increased market activity.

How to calculate slippage?

Calculating slippage is straightforward and involves comparing the expected price of a trade with the actual execution price. Understanding this calculation helps traders assess the impact of slippage on their trades.

The basic formula for calculating slippage is:

Slippage = [(Execution Price – Expected Price) / Expected Price] * 100

This formula gives the slippage percentage, indicating how much the price deviated from the expected price in percentage terms.

Example calculation

Let’s break down a calculation step-by-step:

Determine the expected price: Suppose you plan to buy Bitcoin at $30,000.
Identify the execution price: The trade actually executes at $30,100.
Apply the formula:
Slippage = [(30,100 – 30,000) / 30,000] * 100
  = [100 / 30,000] * 100
  = 0.33%

In this example, the slippage is 0.33%, indicating a small deviation from the expected price.

Tools for calculating slippage

Several tools and platforms can assist in calculating slippage. These tools provide real-time data and automated calculations, making it easier for traders to understand and manage slippage.

• Exchange platforms: Many crypto exchanges have built-in tools to display slippage during trade execution.
• Trading bots: Advanced trading bots can calculate and mitigate slippage automatically.
• Portfolio management software: These tools often include features to track and analyze slippage over time.

Using these tools, traders can stay informed about the slippage they experience and take steps to minimize its impact on their trades.

What happens if slippage is too high?

High slippage can significantly impact trading outcomes and strategies. Understanding the consequences helps traders to be better prepared.

Financial impact

High slippage can lead to substantial financial losses. When the execution price deviates greatly from the expected price, traders might end up paying much more or receiving much less than anticipated. For instance, if a trader plans to buy Ethereum at $2,000 but ends up buying it at $2,100, the additional $100 per unit can add up quickly, especially for large orders.

Trading experience

High slippage can frustrate traders and disrupt trading strategies. Consistent negative slippage might deter traders from executing large or frequent trades. It can also erode trust in trading platforms if slippage is perceived as excessive or unfair.

During flash crashes, prices can drop or spike within seconds, causing significant slippage. Traders might see orders executed at prices far removed from their expectations.

Also, trading in low-liquidity markets or during off-peak hours often leads to high slippage. For example, less popular cryptocurrencies might exhibit greater price swings, leading to slippage.

How to minimize slippage?

Minimizing slippage involves strategic planning and using the right tools. Here are effective methods to reduce slippage:

Limit orders

Using limit orders instead of market orders can help control the execution price. With limit orders, traders set the maximum price they are willing to pay for a buy order or the minimum price they are willing to accept for a sell order. This approach ensures that trades execute only at the specified price or better, thereby reducing slippage.

Trade during low volatility

Choosing optimal trading times can minimize slippage. Trading during periods of low market volatility reduces the likelihood of sudden price swings. Avoiding major market events and announcements can also help maintain more stable prices.

Small order sizes

Breaking down large orders into smaller ones can reduce slippage. Large orders often move the market, leading to slippage. Executing several smaller trades instead of one large trade can help achieve better overall pricing.

Slippage bots

Using slippage bots can effectively mitigate slippage. These automated tools monitor market conditions and execute trades at optimal times to minimize price deviations. Slippage bots can react faster than manual trading, providing an edge in volatile markets.

Examples of slippage bots

1. Cryptohopper: This bot allows users to set specific slippage tolerances, ensuring trades execute within acceptable price ranges.
2. 3Commas: This platform offers advanced trading tools, including slippage control features that help minimize the impact of price changes during order execution.

Final thoughts

Understanding slippage in crypto trading is essential for any serious trader. Slippage can affect trade outcomes and overall profitability. By knowing what slippage is, recognizing its types, and understanding the factors that influence it, traders can better manage their strategies.

Calculating slippage accurately and employing methods to minimize it, such as using limit orders, trading during low volatility, and leveraging slippage bots, can help mitigate its impact.

Frequently Asked Questions

1. 01.

   Is higher or lower slippage better?

   

   Lower slippage is better as it means the trade executed closer to the expected price.

2. 02.

   Is 2% slippage high?

   

   Yes, 2% slippage is considered high, especially for large trades.

3. 03.

   What is the purpose of slippage?

   

   Slippage reflects market price changes between order placement and execution, indicating market volatility and liquidity.