In finance, slippage refers to the difference between the expected price of a trade and the price at which the trade is executed. Slippage occurs when you make a trade-in highly volatile and fast-moving markets prone.
Slippage is inevitable when trading in any market (stocks, forex, crypto,…). However, slippage occurs more frequently and strongly in crypto, as the market is highly volatile and volatile.
What causes Slippage?
There are many reasons for slippage. The most common are:
- Cryptocurrencies are still a highly speculative tool; the buying/selling of transactions takes place continuously, leading to rapid changes in asset prices in a short time.
- Some cryptocurrencies are not popular, leading to low liquidity. Low liquidity causes significant slippage because too few buyers/sellers do not match trades at the expected price.
- Many news and events strongly affect the market; prices fluctuate constantly.
Why does Slippage matter?
You need to pay attention to slippage when trading because this is a factor that directly affects assets and investment efficiency. There are 3 cases when a trade is executed: No slippage, Positive slippage, and Negative slippage. For buy orders, positive slippage will help the trader to get a better entry price than initially intended. In contrast, negative slippage causes the investor to incur a higher entry price, paying more. For sell orders, the opposite is true.
For example, you decide to enter the BTC/USD pair at $39,200. Three possible cases are:
- No slippage: Your buy order will be filled exactly at the price of $39,200.
- Positive slippage: The market volatility caused BTC prices to slide to $39,000 now, $200 less than initially planned to buy.
- Negative slippage: Your buy order was filled when the price of BTC was pushed up, around $39,400, $200 higher than it was initially intended to buy.
Reducing the Effects of Slippage
- Update the news to know important information related to the project or unexpected events that are likely to impact the market strongly.
- Pay attention when trading in sensitive times, especially when the political and social situation is unstable.
- When there is good liquidity, prioritize trading to avoid price slippage due to lack of liquidity in the market.
- Adjust slippage to manage trading risk proactively.
- Use limit and stop-limit orders to prevent trades above or below a set price, and avoid slippage.
Currently, the ONUS application is supporting the slippage adjust feature to help investors set the slippage they are willing to accept and, at the same time, increase the likelihood of successful order matching.
Slippage can become a nightmare for inexperienced investors. So, knowledge about slippage will help you avoid unnecessary risks and make more reasonable investment decisions.
