Thirsty for some Tech Thursday? We got you covered. This week, we’re serving up an explanation of slippage. What is slippage? Why should you care? How can you avoid slippage?
What is Slippage?
Slippage is the difference between how much you expect a trade to cost, versus how much it actually costs by the time it executes. Depending on market activity (how many trades are taking place and price changes of the assets you’re trading), the cost of your trade can change from the time you begin the transaction to its completion. Crypto moves fast, so slippage is a pretty common occurrence.
Why does Slippage occur?
Usually slippage is a problem when liquidity is low. When crypto users make trades in a shallow liquidity pool, or one with a low value of assets, price impact is higher. Essentially, the fewer assets in a pool, the greater the price will vary when trading activity increases.
Why should you care?
Slippage can be good or bad for your trades. Sometimes traders end up buying at a better price than they expected, positive slippage, and sometimes it’s more expensive, negative slippage. If you’re selling, the price going up before trade execution would be positive, and when the buyer benefits from a price drop, sellers experience negative slippage. Slippage can happen in any market, but in crypto, it’s a greater concern because asset prices are volatile. If you’re making a big trade, you can be subject to big losses (or big gains).
How can you avoid slippage?
Many trading platforms will allow users to set their slippage tolerance. You can determine what percentage of slippage you’re comfortable with, and if the trade exceeds those limits, it will not execute. Traders can set stop or limit orders to execute trades at specific prices, or otherwise calculate the impact of their set slippage tolerance.
It’s also a good idea to keep your eye on the market and avoid making trades during especially volatile periods if possible. When there’s big news in the world of crypto (hello, Merge), volatility tends to increase.
Finally, keep an eye on the levels of liquidity for assets you want to trade, the higher the better. Watch the speed with which you execute transactions. The faster the trade, the lower the risk of slippage.
Stay safe out there frens.