What is Slippage? The following is the explanation

What is Slippage

Slippage is the difference between the expected price of a trade and the price at which the trade is actually executed. This often occurs in fast-moving markets, such as cryptocurrency trading, where there may be a delay between order placement and its execution. 

Price differences in slippage usually arise due to fluctuations in market prices when traders submit orders and when orders are processed. While slippage can affect a variety of markets, including forex and stocks, it is particularly prevalent and more pronounced in the cryptocurrency market, especially on decentralized platforms like Uniswap. The increased level of price volatility that is characteristic of cryptocurrencies contributes significantly to slippage. 

Additionally, common challenges faced by many altcoins, such as low trading volume and liquidity, exacerbate the slippage problem. These factors collectively underscore the importance for traders to carefully consider and manage slippage risk when trading in a dynamic, fast-moving market such as cryptocurrency. 

Overall, slippage can impact trading profitability and is an important consideration for traders, especially in highly volatile markets.

Various types of slippage

There are two types of slippage that can occur, namely positive and negative slippage. The following is the explanation.

Positive slippage 

This slippage occurs when the actual trade execution price is lower than the expected price for a buy order, resulting in a more favorable price for traders. 

Negative slippage 

This slippage appears when the executed price is higher than the expected price for a buy order, resulting in a less profitable price. The dynamics are reversed for sell orders.

Excessive slippage can have a significant impact on the profitability of traders who trade frequently. To reduce or avoid slippage, traders can choose limit orders instead of market orders. Limit orders allow traders to determine the maximum price they wish to buy or the minimum price they wish to sell thereby reducing the risk of unprofitable price execution.

However, setting a slippage tolerance that is too low can result in missed opportunities during significant price fluctuations, while setting it too high can leave traders vulnerable to front running. Front Running occurs when traders exploit prior knowledge of pending transactions to gain an unfair advantage in the market.

For less experienced traders, navigating slippage can be a challenge. It is important to understand the volatility of the cryptocurrency being traded and the trading platform being used. By understanding these dynamics, traders can make more informed decisions and effectively manage the risks associated with slippage.

Also Read:

What is an Altcoin Trader?

Understanding Fakeouts in Trading

What is Coin Marginated Trading?

DISCLAIMER : This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.