In the trading world, it’s not rare for individuals to observe that their trade orders don’t always match the expected price. This phenomenon, known as “price slippage,” can sometimes result in orders executing at a higher or lower price than expected. The primary culprits behind slippage are the market’s inherent volatility and the liquidity of the traded assets.
So, What Exactly Triggers Slippage?
When you initiate a trade, you expect it to be executed at a certain price. Yet, due to market fluctuations, the final price might differ. This difference can be advantageous or disadvantageous. For instance, if you aim to buy a digital asset for $100 but acquire it for $98, you’ve benefited from positive slippage. Conversely, if it costs you $102, you’ve encountered negative slippage.
Factors Leading to Slippage
- Volatility – Every financial market is known for its price swings. Supply-demand dynamics, market sentiment, regulatory news, and overall enthusiasm can cause rapid price changes.
- Liquidity Issues – Some digital assets aren’t widely traded, leading to low liquidity. When buyers or sellers are scarce, even a large order can shift the market price.
The Concept of Slippage Tolerance
Traders can set a “slippage tolerance” to control their exposure. It’s a percentage indicating how much price deviation they will accept. For instance, with a 3% tolerance on a $100 order, the trader is comfortable with a price between $97 and $103.
However, a high tolerance can expose traders to “front-running,” where malicious actors exploit the trader’s willingness to accept a higher slippage.
Minimising Slippage
- Use limit orders – Unlike market orders that execute at the best available price, limit orders set a specific price, reducing slippage chances.
- Trade in stable markets – Avoid trading during major announcements or events that induce volatility.
- Opt for liquid assets – More liquid cryptocurrencies are less susceptible to significant slippages.
Final Remarks
Trading is full of surprises, and sometimes, these surprises are not so pleasing. One of these is slippage, but with careful risk management and research, you can minimise its occurrence and safeguard your investments.