Slippage Definition
Slippage is a term used in both traditional and cryptocurrency trading, referring to the difference between the expected price of a trade and the price at which the trade is actually executed. Slippage can occur at any time but is most prevalent during periods of higher volatility when market orders are used. It can also occur when a large order is executed but there isn’t enough volume at the chosen price to maintain the current bid/ask spread.
Slippage Key Points
- Slippage happens when the execution price of an order is different from the expected price.
- It is more likely to occur during periods of high volatility.
- Slippage can be positive or negative, meaning a trade can execute at a better or worse price than expected.
- In cryptocurrency trading, slippage can occur due to the highly volatile nature of the market and the relatively low liquidity compared to traditional markets.
What is Slippage?
In the world of trading, slippage is a common occurrence. It refers to the situation where a trader places an order expecting it to be filled at a certain price, but due to changes in the market, the order is filled at a different price. This difference in price is referred to as slippage.
Why Does Slippage Occur?
Slippage occurs due to the inherent nature of trading markets. The price of a cryptocurrency, like any other asset, is determined by supply and demand dynamics. When a large order is placed, it can exceed the immediate available liquidity, causing the price to move and the order to be filled at a different price. This is especially true in the cryptocurrency market, which can be less liquid and more volatile than traditional financial markets.
When Does Slippage Occur?
Slippage can occur at any time but is more likely during periods of high volatility. This is because rapid price movements can occur between the time an order is placed and when it is filled. Slippage can also occur when trading larger volumes, as there may not be enough liquidity at the desired price level to fill the entire order.
Who is Affected by Slippage?
All traders can be affected by slippage, but the impact can be more significant for high-frequency traders and those trading larger volumes. This is because these traders often rely on precise execution prices for their strategies to be profitable, and any deviation can impact their returns.
How to Minimize Slippage?
Traders can minimize slippage by using limit orders instead of market orders, as limit orders are filled at a specified price or better. However, this comes with the risk that the order may not be filled at all if the market price does not reach the limit price. Traders can also reduce slippage by trading during times of higher liquidity and lower volatility, as these conditions are less likely to cause significant price movements.
