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What is Slippage ?

Newton & KeplerFebruary 4, 2023

1 minute read

Slippage is a phenomenon in trading when the price of an asset moves in a direction that is not favorable to the trader, causing them to execute their trade at a different price than expected. In the context of cryptocurrency trading, slippage refers to the difference between the expected price of a trade and the actual price at which the trade is executed.

Why Does Slippage Happen in Crypto Trading?

Slippage in cryptocurrency trading can happen for a variety of reasons, including market volatility, high trading volumes, and large order sizes. When the market is highly volatile, prices can fluctuate rapidly, making it difficult for traders to execute their trades at the expected price. Similarly, high trading volumes can result in significant price changes in a short amount of time, causing slippage to occur. Large order sizes, on the other hand, can cause slippage because the market may not have enough liquidity to fill the order at the expected price.

How Does It Affect Crypto Traders?

Slippage can have a significant impact on the profitability of a trader’s position, especially if the trade size is large. If the trade is executed at a price that is worse than the expected price, the trader will incur a loss that is greater than the intended risk. On the other hand, if the trade is executed at a price that is better than expected, the trader may experience unexpected profits.

What Can Crypto Traders Do to Minimize Slippage?

There are several strategies that traders can use to minimize the impact of slippage in their trading activities. One strategy is to trade during periods of low volatility, when prices are less likely to fluctuate rapidly. Additionally, traders can also place smaller order sizes to reduce the risk of slippage, or use limit orders instead of market orders. Limit orders allow traders to specify the maximum price they are willing to pay or the minimum price they are willing to receive for their trades, reducing the risk of slippage.

Another strategy is to trade with a reputable and trustworthy exchange that has sufficient liquidity. Exchanges with high liquidity can provide traders with better fill prices and reduce the likelihood of slippage occurring.

Slippage is a common phenomenon in cryptocurrency trading and can have a significant impact on the profitability of a trader’s position. By understanding the reasons why it occurs and implementing strategies to minimize its impact, traders can better protect themselves and maximize their profits. However, it is important to note that no strategy can guarantee the complete elimination of slippage and traders must always be prepared to manage their risk when trading in the cryptocurrency market.