What is Slippage?
Slippage refers to the price difference between when a trader submits an order and when that order is actually executed on a blockchain or cryptocurrency exchange. It occurs primarily due to rapid price fluctuations or insufficient market liquidity, leading to trade execution at a price higher or lower than anticipated.
Key Causes of Slippage
- Market Volatility: Cryptocurrency prices move rapidly. High volatility increases the likelihood that prices shift during the brief period between order placement and execution.
- Insufficient Liquidity: In markets or trading pairs with low volume, filling a large order may require executing against multiple order book levels or liquidity pools, worsening the average price.
- Order Types: Market orders prioritize execution speed over price, making them highly susceptible to slippage.
How Traders Can Reduce Slippage
- Opt for Limit Orders: Executing limit orders ensures that trades only fill at a specified target price or better, completely eliminating unfavorable price execution.
- Set Slippage Tolerance: On decentralized exchanges (DEXs), traders can customize their slippage tolerance settings to automatically cancel trades if the price moves beyond an acceptable percentage threshold.
- Trade High-Liquidity Assets: Sticking to established assets and trading pairs with high volume minimizes market impact.