What Is Slippage in Crypto? Key Concepts
The last thing you want happening when looking to buy a new crypto is your buy order getting executed at a significantly higher price than you expected. But the reality is scenarios like this happen all the time in crypto. Skilled crypto traders know how to deal with the slippage in the price of cryptocurrencies to avoid losing money unnecessarily.
In this guide, you’ll learn how to make more profits and protect your trading capital by getting answers to questions like “What is slippage in crypto?” and “What is slippage tolerance in crypto?” in addition to learning why it happens, and how to deal with it.
Introduction to Slippage
Slippage is a common word in the finance space used to describe the difference between the price you expect your trade to be executed and the price your trade is executed.
In short, slippage is the expected price minus the executed price. But more specifically, what is slippage in crypto?
To illustrate what slippage means in crypto, assume you have $100 in your crypto wallet and you want to buy Ripple (XRP) coins at a current market price of $5 per XRP coin. From your projections, if you buy $100 worth of XRP tokens, you will receive 20 XRP tokens.
Assuming the market becomes volatile due to favorable news from the SEC. Many crypto investors will expect a bull run and there could be tons of traders trying to buy more of these tokens due to the fear of missing out. Because of the buying pressure, there could be rapid price fluctuations.
At this point, opening a market order to buy some XRP tokens could result in slippage. Such that, instead of buying the coins at $5 each, you end up buying at $5.25 instead.
Because of the slippage in price, you would now receive 19 tokens instead of 20. This shows how impactful slippage can affect your entry prices. But what is slippage in crypto trading?
Slippage in Cryptocurrency Trading
Although crypto traders use centralized exchanges like Binance and eToro and decentralized exchanges like Uniswap and PancakeSwap, slippage is more common on dexes.
Here’s an illustration to understand how slippage affects cryptocurrency trading. From the example, the slippage in percentage is the executed price ($5.25) minus the expected price ($5) multiplied by 100, resulting in a 5% slippage.
Because of how frequent price volatility is, dexes like Uniswap have slippage settings. These settings allow traders to choose the maximum slippage allowed. Some of the most common slippage options are 0.5%, 1%, and 5%.
Why Slippage Occurs and Its Impact on Traders
We’ve defined and illustrated what slippage is in crypto trading. But what is slippage tolerance in crypto? We’ll take a deep dive into why slippage occurs and its impact on traders and answer the question, “What is slippage tolerance in crypto?”
Slippage occurs due to two major reasons: market volatility and low liquidity. Market volatility causes wild swings in the price of cryptocurrency such that before your order executes, the price changes sharply to fill at a different price.
On the other hand, low liquidity happens when a small number of buyers or sellers of a particular crypto coin is in the market. Because of the lack of liquidity, orders get delayed until there is sufficient liquidity in the market for a trade to execute.
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When a crypto coin has low liquidity, there’s a wide gap between the ask price and the bid price, leading to dramatic changes in the price. Market volatility and low liquidity can lead to lower profits, heightened losses, and increased trading risks. This also occurs in stock trading, so we advise that you read the AI stock trading app 2024 reviewed – pros & cons.
One way to guard against the negative impact of slippage is to stick with a slippage tolerance. A slippage tolerance is the maximum amount of slippage you’re willing to accept per trade.
If you set a slippage tolerance of 5%, your order will only be executed once the slippage is less than 5%. This way, you can minimize risks and protect your capital. We also recommend that you allocate a small proportion of your portfolio into penny stocks via any of the best penny stock apps 2024.
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Types of Slippage
You may think slippages are usually bad occurrences. This is not always the case. So, what is slippage in crypto swap, and what are the types? There are two types of slippages in crypto trading: negative and positive.
Negative slippage means the executed price is higher than the expected price for a buy order or the executed price is lower than the expected price for a sell order.
This implies that the trade was executed at a less favorable rate, leading to reduced profits or losses.
On the other hand, positive slippage means the executed price is lower than the expected price for a buy order, or the executed price is higher than the expected price for a sell order.
This means that the trader buys the crypto coin at a lower price or sells it at a higher price for profit. Overall, positive slippages are beneficial, while negative slippages are risky.
Differences Between Price Slippage and Execution Slippage.
|The difference between the expected price of an asset at the time of placing an order and the actual market price at which the trade is filled.
|The difference between the intended execution price of a trade and the actual executed market price at the time of execution.
|Primarily caused by market volatility, liquidity, and order size.
|Caused by several factors, such as market volatility, liquidity, order size, order type, and the timing of the trade.
|Impact on traders
|Can result in both positive and negative outcomes. Traders may get a better or worse price than intended.
|Has a negative impact on traders as it results in a less favorable price than expected, leading to losses.
|Occurs in every trade, although it varies based on market conditions.
|Occurs in specific conditions when market conditions deviate from the norm.
|Selling a crypto coin at a lower price than expected due to a market crash.
|Placing a limit order to buy some crypto but not getting it filled due to a quick price change.
How market orders and limit orders can be affected differently
Although slippage occurs in both market and limit orders, it impacts them differently, especially when swapping crypto for another on a dex. So, what is slippage in crypto swap, and how does it affect market and limit orders?
When trading on a dex, there’s usually a preset slippage tolerance. You can change this at will or leave it in default. Because many crypto pairs on decentralized exchanges have very low liquidity, it usually broadens the gap between the intended buy and executed prices.
Stick with crypto pairs with high liquidity levels to avoid slippage in crypto swaps. Some popular crypto coins with high liquidity are BTC, ETH, USDT, USDC, and XRP.
What is Slippage in Crypto Swap During Market Orders?
Market orders are filled instantly at the prevailing market price. This means your trade is executed at the best available price. Slippage in crypto swaps during market orders can be positive or negative.
Positive slippage occurs when you get a better price than expected at the current market price. For example, if you place a market order to buy a coin, and the price drops before your trade executes, you end up buying the coin at a much lower price than you intended.
On the other hand, negative slippages occur when the market moves against you, and your trade gets filled at an unfavorable rate. This means you’re forced to buy an asset at a higher price or sell at a lower price, leading to losses or minimal gains.
What is Slippage in Crypto Swap During Limit Orders?
Unlike in market orders, it is uncommon for slippages to happen in limit orders. Limit orders execute only at a specific price. So, the system holds your order until the market price reaches your limit order price before executing it.
Many traders use limit orders to guard against price volatility and secure good market entry. But sometimes, price fluctuations can be so rapid and sharp that they could cause the limit orders to activate but get filled at a different price than planned.
Slippage affects limit orders by causing partial fills. Partial fills occur when part of your order is filled at the specified limit price while the rest remains unexecuted or gets filled at a less favorable price due to slippage.
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Market liquidity is a major factor determining slippage tolerance in crypto. So, what is slippage tolerance in crypto, and how does it relate to market liquidity?
Relationship between Liquidity and Slippage
Understanding the relationship between liquidity and slippage is crucial to helping you make informed trading decisions in erratic markets.
Liquidity refers to the ease at which a trader can buy or sell an asset without causing a significant price change. Slippage occurs more in markets with low liquidity and less in highly liquid markets.
How High and Low Liquidity Conditions Affect Slippage
Large trades can be executed in highly liquid markets with zero or minimal price slippage. In contrast, low liquidity can cause even small trades to result in significant price fluctuations, leading to large price slippage.
Slippage is more common in markets with low liquidity because there are fewer buyers and sellers to stabilize the price direction. It’s advisable to avoid buying a crypto asset with very low liquidity, as it can be difficult to sell due to a scarcity of buyers.
Volatility and Price Movements
The next factors worth considering are volatility and price movements. If you want to understand why some coins are more volatile than others, this section gives you all the answers you need. So, what is slippage tolerance in crypto, and how does it relate to volatility and price movements?
How Sudden Price Fluctuations Contribute to Slippage
The extent of price fluctuations determines the slippage levels. If the price fluctuates sharply within a wide range, the slippage will be higher than if the price fluctuates within a smaller price range.
To illustrate how price fluctuations contribute to slippage, assume you want to buy a crypto coin, but the market price ranges from 1.10 to 1.08 and 1.06. There’s a good chance your order gets filled within that range.
But if the price rises or falls sharply, your trade can get executed at 1.25, showing how price fluctuations influence slippage levels.
Understanding the Impact of Market Volatility on Order Execution
Many crypto exchanges have measures to protect traders from excessive risks during increased market volatility. Most exchanges don’t execute market orders if the trading price deviates significantly from the market price.
This mostly occurs when a coin with a relatively low trading volume suddenly experiences an influx of trading activities leading to high volumes. Although this happens in all crypto markets, it is more pronounced in the futures market.
Additionally, high market volatility in the futures market could result in an instant order execution and liquidation. It simply means that the market reached your entry price, got executed, and the price moved so fast against your trade, forcing your trade to close, leading to instant liquidation.
Although market volatility presents several risks, it also sometimes presents profitable opportunities. Most times, price volatility is more severe on the smaller time frames.
Adopting higher time frames like the 4-hour and 24-hour time frames can help you define the price trend and leverage it to set the best entry point and take profit levels.
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If slippage is a crucial factor influencing your trade’s profitability, then you must learn how to measure it. So, What is slippage tolerance in crypto measured with?
How to calculate slippage using the expected vs. executed price
You can use online slippage calculators to calculate slippage directly by inputting the crypto name and desired executed price. But to understand what goes on behind the scenes, here’s how to calculate slippage.
Slippage (%) = (Executed Price – Expected Price) / Expected Price) * 100
So, using Bitcoin as an example, assume the anticipated buy price is $25,500, and the current price is $25,550. Plugging the numbers into the equation above results in the following.
Slippage Calculation: (25,550 – 25,500) / 25,550 * 100
In this example, slippage caused the fill price to be higher than expected. However, slippage can make the fill price to be lower than anticipated.
Using slippage as a metric to evaluate the efficiency of trades
You can use slippage as a metric to evaluate how efficient your trade is in three different ways.
- Determining the execution cost: You can use slippage to measure the cost of executing a trade by adding the slippage to the order amount—a high slippage results in a higher execution cost, reducing profitability.
- Measuring the market liquidity: Aside from determining the execution cost, you can use slippage to know how liquid a market is. A high slippage indicates that the market has low liquidity and vice versa.
- Evaluating a trading strategy: You can also use slippage to evaluate how effective your trading strategy is. A trading strategy that relies on market orders will experience more slippage than another that works on limit orders.
Your capital is at risk.
Slippage can cost you some portion of your profits, leading to unavoidable losses at other times. But you can prevent these adverse effects. So, what is slippage in crypto trading minimization strategy?
Strategies for minimizing slippage
You can minimize slippage by sticking to the best trading practices.
- Use Limit Orders
Avoid using market orders as they pose the greatest risks to executing an order at the expected price. Instead, use limit orders to ensure your orders fill with zero negative slippage.
- Choose a Reliable Trading Platform
Using a crypto exchange with a slow trading platform can contribute to higher price slippage. Choose an exchange tested and trusted for fast execution speeds to reduce delays in filling orders and limit slippage risks.
- Study the Current Market Conditions
Before opening a trade, study the market to determine when there’s a higher chance of high volatility or low liquidity. Once you identify these regions, you can avoid it or adjust your trade settings to reduce slippage risks.
Utilizing order books to gauge potential slippage before placing trades
One trick you can use to know a slippage is incoming is watching the order book. The order book lists all buy and sell orders at different prices.
It shows the order price and the quantity of crypto coins traders are ready to buy. The price with the largest order will likely cause a drastic shift in the coin price.
If the largest order is on the buy side, you can leverage it by placing a buy order close to that order price. This way, you can guarantee that your order gets filled with low slippage before other orders before a price reversal.
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Slippage in Different Trading Scenarios
It’s not enough to understand what slippage entails; you must be able to apply your knowledge to actual trading. So, what is slippage in crypto trading in different trading scenarios?
Slippage in normal market conditions vs. during high volatility
In normal market conditions, slippage is usually low or zero in highly liquid markets. However, during periods of high volatility, slippage increases because of quick rises and falls in price.
When trading in a normal market, you can open a market order, and your trade will execute at the right price. But when trading in markets with high volatility, it’s advisable to use limit orders to avoid price slippage. This is also a strategy you can apply on DeFi apps, so check out the 10 Best DeFi Apps 2024 Revealed!
Slippage in large trades compared to small trades
Large orders can cause significant price changes compared to small trades, which happens frequently in markets with low liquidity.
But it can also occur in highly liquid markets where one large sell order causes traders to rush into panic sales. Slippage in large orders results in high market volatility, while slippage in small orders rarely influences market volatility.
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Managing Slippage Risk
It is crucial to consider slippage not only when initiating a trade but also when concluding it. So, how do you manage slippage risk, and what is slippage tolerance in crypto have to do with it?
Setting appropriate stop-loss and take-profit levels.
Set stop-loss and take-profit levels the moment you’re opening a trade. This way, you can scalp your profit and reduce losses before the price changes direction against your trade. You can also check out the best paper trading apps 2024 – pros & cons to buy and sell assets in a risk-free environment.
Adjusting trade sizes based on market conditions to reduce slippage.
Adjusting trade sizes based on market conditions can be a smart strategy to reduce slippage. So, what is slippage in crypto swap adjustment strategy?
- In a highly volatile market, reduce order size to lessen slippage risk.
- Change from using market orders to limit orders to swap crypto with reduced slippage.
- Trade at peak trading hours as there’s usually more liquidity and less slippage at that period.
- Reduce trade sizes or avoid trading during major news events, which could result in high market volatility.
- If possible, use trading algorithms or bots that adjust trade sizes dynamically based on real-time market conditions.
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Using Slippage to Make Informed Decisions
You’ve learned what slippage is and how to manage and reduce it. Now, you’ll learn how to use slippage to make better-informed trading decisions.
Considering potential slippage when evaluating risk-reward ratios
What is slippage tolerance in crypto used for when evaluating risk-reward ratios? You use slippage tolerance to calculate the maximum amount you’re willing to lose per trade.
So, if you initially set your stop loss to 3%, and the slippage tolerance for that coin is 0.5%, adding both will yield a final stop loss of 3.5%. This way, you can accommodate potential slippage when evaluating your risk-to-reward ratio. You can also evaluate the risk-to-reward ratio with the best NFT apps for 2024 – Buy NFTs on Your Mobile.
Incorporating slippage calculations into trading strategies
What is slippage in crypto trading used for when designing a trading strategy? You can use slippage to determine your entry and exit points.
First, study the market to determine the average slippage; let’s assume it’s 3%. Once you see a potential entry point, subtract 3% from that entry price to get a new entry price. The new entry point is less risky because you’ve accounted for slippage. The same goes for the determination of exit points.
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What is Slippage in Crypto? – eToro Complete Guide
Trading on a broker platform that allows fast execution of trades is one key way to minimize slippage risks. We recommend eToro for a pleasant crypto trading experience. To set up an account on eToro, take the following steps.
- Step 1: Visit www.eToro.com and click the “Join eToro” icon. The site will redirect you to the registration page.
- Step 2: Sign up via Google or Facebook or use your email directly.
- Step 4: Click “Create account” and confirm your signup by verifying your email address.
- Step 5: Complete your profile by providing your details in the KYC verification section. Once you’ve completed your profile, your account is active and ready to use.
What is Slippage in Crypto? – Conclusion
Slippage in crypto is the difference between the expected order price- the currency market price or a set limit price, and the price the order executes.
Slippage happens due to low market liquidity, high volatility, and large order sizes. However, it can be minimized by using limit orders instead of market orders, setting stop-loss and take-profit levels, reducing order size, and using a reliable trading platform. You can also test this strategy with any of our 10 best DeFi apps 2024 revealed.
A good trading platform will enable you to perform market research to pinpoint areas of high slippage to factor that into your trading strategy. The best crypto trading platform to enjoy a profitable trading experience with minimal slippage occurrences is eToro.
With eToro, you can trade cryptocurrencies, stocks, forex, and more with low fees, minimal slippage, and high execution speeds. Plus, eToro offers a variety of educational resources to know the best time to trade and improve your trading skills. So what are you waiting for? Sign up for eToro and start trading today!
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