Hey there,

When trading cryptocurrency, understanding how the market moves and placing trades with high efficiency and win rate is essential for one to succeed. Among the factors affecting trading results, slippage is one the most significant ones that puts new traders on the edge because they do not completely understand slippage trading.

Slippage basically means the difference between the expected price and the actual price at which a trade is executed. Taking the analogy of you making a grocery list, you’ve already made the list with a budget based on your information of the current market prices, but it becomes a fact that on getting to the grocery store, more often than not, there's a difference between the selling price of the groceries and the budget amount in the grocery list you made, that difference in price is what we call Slippage in the crypto world….

Slippage can be positive or negative but it is generally counted as an undesirable outcome when there's a significant amount of slippage as it could affect the worth of the trade you want to place.

Slippage Definition:

Slippage, in essence, represents the difference between the expected price of a trade and the actual price at which it executes.

It is the difference between the expected price of trading and its actual price. Remember the analogy used to explain this above and you’d have understood the meaning of Slippage.

Understanding the Causes of Slippage

Slippage is actually caused by the volatility in market prices. (Don’t mind the big terms, just referring to the unpredictable change in market prices). These prices can change rapidly due to news affecting the national economy or heavy impact events such as Wars or worldwide Holidays. It could also arise due to public opinions about some financial or political policies/actions. (Don’t forget, the world is ruled by the masses, partly!).

Due to this volatility, traders could place a trade at a particular price but in a matter of seconds before the trade gets filled, the price could change thereby resulting in slippage. The fact is that Slippage is almost a non avoidable financial occurrence particularly evident in huge volume trading but you could also choose more stable times to trade to avoid a very huge amount of slippage.

Types of Slippage

Slippage can manifest in two primary forms:

Positive Slippage: Occurs when the execution price is more favourable than the intended price. This situation is generally advantageous for traders, as they acquire or sell cryptocurrencies at a better price than initially anticipated. What this means is that they get a larger amount of crypto or cash than expected just because the slippage is favourable at that point.

Negative Slippage: Occurs when the execution price is less favourable than the intended price. This situation is detrimental for traders, as they end up paying more or receiving less than expected, negatively impacting their trading profits.

Factors Influencing Slippage

Several factors contribute to the occurrence of slippage in crypto trading:

Market Liquidity: Low liquidity, particularly for less-traded cryptocurrencies, can lead to significant price movements when large orders are placed. This increased volatility can result in substantial slippage. By liquidity we mean low participation or activity in that commodity market.

Order Size: Larger order sizes tend to experience more slippage compared to smaller orders. This is because larger orders can have a greater impact on market prices, causing the execution price to deviate from the intended price. It's a fact that Market Economics has shown, prices tend to spike in scarcity and drop in excess of the required commodity. So when there's a large sell or buy order, slippage becomes much more significant, positively or otherwise.

Market Volatility: Volatile market conditions, where prices fluctuate rapidly, can exacerbate slippage. During periods of high volatility, it becomes increasingly difficult to predict the exact price at which an order will execute. This could also refer to periods of high or low liquidity.

Exchange Execution Mechanisms: The order execution mechanisms employed by different cryptocurrency exchanges can also influence slippage. Some exchanges prioritise price matching, while others prioritise order execution speed (Precision vs Speed). The choice of exchange can affect the degree of slippage experienced.

Minimising Slippage in Cryptocurrency Trading

While slippage is an inevitable aspect of cryptocurrency trading, there are strategies that traders can employ to minimise its impact:

1. Limit Orders:Limit orders are market orders that say “I want to buy at this price and I will only sell at this price”. This in turn ensures that your trade is only successful at your specified price and this can help control slippage to an extent.

2. Market Orders: Market orders are executed at the best available market price at the time of the order. While they guarantee order execution, they are more susceptible to slippage, especially in volatile markets.

3. Choosing a Reliable Exchange: You might want to try choosing Exchanges that have a lot of activity on them, preferably some of the most popular ones, or you could do some research on the exchange mechanism of several exchanges and pick out the one you think would suit your choice (Speed of order completion or Price precision, it's your choice !).

4. Trading during times of low liquidity: Every market experiences periods of low market activity, could be at night when a lot of market users are sleeping or holidays when people are having a good time. Either way, trading during periods of lower market activity can help reduce slippage, as liquidity tends to be higher.

5. Splitting up your Trades: You can consider splitting large orders into smaller ones. This would minimise the impact on market liquidity and reduce slippage.

Conclusion

Cryptocurrency trading slippage is unavoidable in crypto trading , but understanding its causes and implementing effective strategies can help traders minimise its impact. By considering and implementing the above, you can make your trades without experiencing losses due to slippage. Welcome to the World of Crypto…..