Slippage happens when traders have to settle for a different price than what they initially requested due to a price movement.
What Is Slippage?
When cryptocurrency traders place a buy or sell order on an exchange, they typically expect said order to be filled at the exact price they’ve chosen. Unfortunately, this isn’t always the case, due to a costly problem called slippage.
Slippage happens when traders have to settle for a different price than what they initially requested due to a movement in price between the time the order (say for Bitcoin) enters the market and the execution of a trade. This phenomenon can occur in all markets, like forex and stocks. However, it is more frequent, and a lot worse, in crypto markets (especially on decentralized exchanges like Uniswap) due to the high levels of price volatility. In addition, common pain points that the vast majority of altcoins suffer from such as low volume and liquidity may also contribute to slippage.
There are two types of slippages: positive and negative. If the actual executed price is lower than the expected price for a buy order, it is considered positive slippage since it gives traders a better rate than they originally intended. If the actual executed price is higher than the expected price for a buy order, it is considered negative slippage since it gives traders a less favorable rate than they originally tried to execute. The opposite is true for sell orders.
Too much slippage can cost frequent traders a lot of money. In order to reduce, if not eliminate slippage, traders can avoid executing market orders and opt to execute limit orders instead since these types of orders don’t settle for an unfavorable price.
On the other hand, setting your slippage tolerance too low (normally you have to set a percentage of 0.1% to 5%), may mean that your transaction never executes and you miss cashing in (or out) during a big price jump or drop. Set it too high and you may become the victim of frontrunning.
Slippage can quickly become a frustratingly slippery slope for the less experienced trader, so it’s important to understand the volatility of both the cryptocurrency and the trading platform you’re dealing with.