Types
Let’s start by examining the types of slippage in crypto, as well as why slippage happens.
Types of Slippage
Slippage can be either positive or negative. Some would say that there is a third type of no slippage, but many others argue that it is impossible to trade crypt with absolutely no slippage.
Positive slippage happens when the price you end up getting is better than the price you had requested. For example, if you try to buy crypto at a price of $50 per coin/token and the price suddenly drops to $48, you will experience positive slippage.
Negative it is essentially the same, only in the opposite direction. If you wanted to buy at $50 and the price shifts to $52 after you have placed an order but before it is executed, the slippage will be negative.
Why Does Slippage Happen?
Trading slippage typically happens due to increased market volatility, which causes sudden price changes. Crypto prices change all the time, but during particularly volatile markets, changes can be quite severe. Sometimes, liquidity issues can also lead to a slippage. In low-liquidity environments, order execution may take a while, giving the market additional time to experience price changes.
How Does Slippage Affect Your Trades?
Slippage can affect your trades in multiple ways, such as leading you to avoid specific strategies or impacting the cost of trades.
Impact on Trading Strategies
Different strategies can be affected by slippage in different ways. Take day trading as an example. Day trading involves making one or more trades within the same day. Trades often last anywhere from a few minutes to a few hours, and during this time, prices can be severely affected, when even the smallest changes can have a big price impact.
This can be felt even more strongly when it comes to scalping — a strategy where traders only leave their positions open for mere seconds, or minutes at the longest. Scalping is a form of high-frequency trading, where traders rely on quick trades. Tight price targets are of utmost importance to them, and so sharp changes can strongly affect the result of their trades.
This also opens unique earning opportunities but at a much greater risk.
Example Scenarios
Let’s say that you want to buy Bitcoin at a price of $92,000 per coin. You submit the order, but before it gets filled, its price drops to $90,000 per coin — you will save $2,000 per each purchased BTC.
If, on the other hand, you try to buy BTC at the price of $90,000 per coin and it goes up to $92,000 per coin, that is negative slippage. In this scenario, you will lose $2,000 per BTC compared to the price you were expecting.
Costs Associated With Slippage
The biggest cost associated with slippage comes from negative slippage. If you have to pay more per token than you accounted for, you will suffer greater costs. In some cases, it may be minuscule, but over several purchases, such small costs will eventually add up and become noticeable.
Common Causes of Slippage in Crypto Trading
Market Liquidity
Market liquidity is a common cause of slippage which happens when the liquidity pool doesn’t have the crypto assets to accommodate your order. This can lead to a bit of a waiting period, which gives the market more time for the price to change and cause slippage.
Order Type & Size
Order type and size can also have a similar impact, as larger orders or uncommon order types can lead to longer waiting periods. With constant price movements, long waiting periods are easily the main cause of slippage.
Market Events
Another big factor are market events which can affect market sentiment, and push the prices in one way or the other. One big example recently was Donald Trump’s victory in the US presidential election, which caused a major rally that pushed BTC to a new all-time high.
How to Minimize Slippage in Crypto Trading
There are several ways to minimize slippage in crypto trading and improve your odds of avoiding losses in the cryptocurrency market.
Choosing the Right Trading Time
Timing is everything, and while you can never predict what might happen, choosing the right trading time can help you avoid slippage. You should try to place orders during the time when the market is calm and investor activity is low, as that is when volatility is at its lowest, as well.
Using Limit Orders
Limit orders are a good way to control trade execution price, as they allow you to exit your position when the price reaches a certain threshold.
Opt for High-Liquidity Markets
Using high-liquidity market is another great way to reduce chances of slippage, as your orders are likely to be completed quickly, if not instantly, in high-liquidity environments.
Setting Slippage Tolerance
Slippage tolerance lets you control how much slippage you are willing to accept before making a trade. Most DEXes will allow you to set up slippage tolerance and move it anywhere from 0.1% to 1%. Typically, low-liquidity assets or highly volatile cryptos should have a higher tolerance.
As for CEXes, they usually calculate slippage automatically, and limit orders are the way to go here.
Avoiding Market Orders in Volatile Conditions
The best way to avoid slippage is to not risk it and stay away from the markets when they are highly volatile. If you can afford to wait, do so, and let the markets settle before you make your move.
Tools & Platforms to Minimize Slippage
Decentralized Exchanges
DEXes typically use Automated Market Makers (AMMs) to handle trades, meaning that they rely on smart contracts and liquidity pools. With larger pools, your order is more likely to get processed quickly, and suffer lower slippage.
Trading Bots & Algorithms
Trading bots and algorithms bring automated trading into the picture, enabling great precision and efficiency unmatched by human traders. As such, they can execute trades faster, and quickly calculate how to adjust trades to fit market conditions in real-time.
Popular Crypto Platforms & Their Slippage Features
Expert Tips for Managing Slippage
Monitoring Market Depth
Market depth is the number of buy and sell orders at different price levels in the market, and by keeping a close eye on it, you can determine how volatile and risky the market is.
Using Alerts & Analytics
By using alerts on trading platforms and other trading tools, you can become aware of any changes in market conditions faster, and modify your strategy to fit the situation quickly. Analytics tools also help you predict market movements, price actions, and even trading volatility.
Diversifying Trading Strategies
You should try to learn a multitude of different strategies and practice switching between them to find the ones that best fit different shifts in the market. Some traders believe that you should pick a strategy and stick to it, which may work in some situations, but the more you know, the better prepared you are for different situations.
Common Mistakes to Avoid
Overlooking Trading Fees
You should always remember to check the crypto trading fees on the platforms you use, as high fees can add even greater expense to the costs you suffer from slippage. Furthermore, it can also affect fees, making them higher or lower, depending on the final price of the asset.
Ignoring Volatility Indicators
Traders sometimes ignore volatility indicators because it would be inconvenient to abort and wait. Greed often plays a role here, as well, leading them into a highly volatile market, and resulting in negative slippage.
Using Market Orders in Thin Markets
Thin markets are markets with high volatility and low liquidity. Placing an order in these conditions could result in a very long wait period, during which the prices are bound to shift. Sometimes by quite a lot. The best way to avoid this is to avoid thin markets altogether.
