Slippage

What is Slippage?

Slippage in cryptocurrency trading refers to the difference between the expected price of a trade and the price at which the trade is actually executed. It occurs when market conditions change between the time an order is placed and when it is filled.

Key Characteristics

1. Price Difference: The disparity between expected and actual execution price.

2. Market Volatility: More common in volatile or low-liquidity markets.

3. Order Size: Larger orders are more susceptible to slippage.

4. Directionality: Can be positive (better price) or negative (worse price).

How Slippage Occurs

1. Order Placement: A trader places a market order or a large limit order.

2. Market Movement: The market price moves before the order is fully executed.

3. Order Execution: The order is filled at a different price than initially quoted.

4. Price Impact: Large orders can themselves cause price movements, leading to slippage.

Importance in Cryptocurrency Trading

• Cost Factor: Can significantly impact the profitability of trades, especially for large orders.

• Risk Management: Traders need to account for potential slippage in their strategies.

• Market Efficiency: Reflects the liquidity and depth of a market.

• Order Type Selection: Influences the choice between market and limit orders.

Mitigating Slippage

• Limit Orders: Using limit orders instead of market orders to set a maximum acceptable price.

• Slippage Tolerance: Setting a maximum acceptable slippage percentage.

• Trading During High Liquidity: Executing trades when markets are most liquid.

• Splitting Large Orders: Breaking large trades into smaller ones to reduce market impact.

Similar Terms

• Liquidity: The ease with which an asset can be bought or sold without causing a significant price change.

• Technical Analysis: The broader field of study that includes pattern analysis.

• Smart Contract: Self-executing contracts that are programmed on a blockchain.