What is slippage in crypto trading?

Slippage describes a situation where the expected price of a trade is different from the price obtained when the trade is executed. Slippage usually occurs when a trading platform can’t immediately execute a trade at the preferred price.

Crypto traders usually want to avoid slippage as much as possible. This is because it adds more uncertainty and volatility to a market that’s already unpredictable. By understanding slippage, you can take steps to manage its impact on your crypto trading strategy.

In this article, we'll explore what slippage is in more depth, how it affects your trades, and what you can do to reduce the impact of slippage.

TL;DR

• Slippage refers to situations where the fill price you receive when trading an asset is different from the price you expected.

• Slippage can be caused by low liquidity and high market volatility, making it an unpredictable force for traders.

• Both positive and negative slippage can be experienced. Negative slippage refers to worse than expected prices, while positive slippage refers to better than expected prices.

• It’s possible to minimize the impact of slippage, for example, by focusing on assets with high liquidity, only trading during periods of high activity, and placing multiple small orders rather than a single large order.

What is slippage?

By now, we know that slippage is the difference between the expected price of a trade and the final price at execution. Looking more closely, both positive and negative slippage are possible. Negative slippage occurs when prices are worse than expected, while positive slippage describes when prices are better than expected. In some situations, you'll also face no slippage.

What causes slippage?

Slippage is caused by a change in the bid/ask spread between the time a trader places an order and the order being executed by the market maker. The bid/ask spread represents the difference between the lowest ask price and the highest bid price in an order book.

If an order can't be filled at the desired price, the order book will execute the order at the next best price, resulting in slippage. Sometimes, particularly with large orders, only part of the order can be filled at the desired price, with the remaining portion filled at the next best price.

An example of slippage

Let's look at an example of negative slippage. You want to buy SOL through a market order, and the token is priced at 168.19. The order is placed, but due to market volatility, the fill price rises to 168.84. That's not a disaster if you're only buying one unit of SOL, but it's clear how slippage can erode the value of trades if you're trading at high volumes.

Positive slippage is the reversal of this example — prices fall after you've placed a buy order, resulting in a better price than expected. Although that sounds positive, many traders prefer full clarity over the fill prices they receive.

How to minimize slippage

Although slippage can't always be avoided, there are steps you can take to minimize its impact on your trading strategy.

Place smaller orders

Large orders can lead to higher slippage because higher volume trades have a bigger impact on prices. You can avoid this by splitting a large order into smaller individual orders placed over time. Although this tactic can manage slippage, it's important to consider another risk here — that prices move against you before you've opened all your positions.

Use limit orders

Using a limit order when you place a trade can help you avoid slippage and get the prices you want. Both a buy limit and sell limit order can be used depending on whether you're looking to buy or sell an asset. Once a limit order is set, the exchange or broker will only buy or sell at the price you state.

Trade assets with high liquidity

Low liquidity is a common cause of slippage as there isn't enough depth in the order book to fulfill every order at the desired price. You can minimize your exposure to this situation by choosing to only trade assets with high liquidity. Look at the trading volume of tokens to understand which are being bought and sold regularly, and focus on those with a larger market cap, such as BTC, ETH, and SOL.

Only trade during hours of high activity

To avoid low liquidity and the chance of slippage, consider only trading during hours of high activity. Liquidity will also be higher during these times. To do so, you could choose to trade during hours where timezones overlap, when traders from more locations will typically be online. Meanwhile, many exchanges also provide tools for checking the volume of crypto assets being traded, so you can see what's popular in near real-time.

The final word

Slippage is an important force in crypto trading that can have a significant impact on your gains and losses, particularly if you trade often and at high volumes. It's another factor you should consider each time you plan a trade, but also one that can be minimized using the tactics outlined in this article.

There are many other steps you can take to improve your trading strategy and manage risk among crypto's inherent volatility. To learn more, read our guide to stop-loss and take profit, and our article exploring dollar cost averaging.