All levels of cryptocurrency traders, from novices to seasoned pros, may experience unanticipated losses as a result of slippage. This problem is not exclusive to cryptocurrency markets; it also exists in conventional stock markets. However, the issue is made worse by cryptocurrency’s inherent volatility.
To improve your trading results, you must comprehend what slippage is, why it occurs, and how to minimize it. We’ll discuss what crypto slippage is and how to deal with it in this post.
What is Slippage?
When a trade’s actual execution price deviates from your anticipated price, this is known as slippage. This discrepancy is caused by the time lag between placing an order and its fulfillment; in markets that move quickly, even a split second can have a significant impact.
The actual trading price may differ greatly from the initial quote under turbulent situations because prices might change several times in a second. This can swiftly reduce earnings or make a profitable trade lose money. Although slippage also impacts stocks and FX, traders are more likely to be concerned about it due to the tremendous volatility of cryptocurrencies.
Slippage in Crypto
Slippage in cryptocurrency trading is the discrepancy between the actual execution price and the anticipated order price. It can be either positive, where traders receive a higher price, or negative, where the final trade turns out to be less advantageous than anticipated. The main issue is the negative slippage, which lowers profitability.
There is a higher risk of slippage because cryptocurrency markets are constantly active and fluctuate quickly. Particularly at risk are market orders, which fill at the best prices. The exchange might have to fill your order at many price points if there is little liquidity.
Large order sizes, abrupt volatility surges, and network congestion can all make the effect event worse. Execution strategy is essential since news events, big transactions by whales, or unforeseen market movements frequently result in abrupt price swings in a matter of seconds.
How to Avoid Slippage in Crypto Trading
While it’s not possible to eradicate slippage entirely, you can take steps to minimize your exposure to it.
1. Use Limit Orders Instead of Market Orders
Limit orders functionality is a very good way to reduce slippage. You can specify the precise price at which you wish to purchase or sell an item with a limit order. Only when the market hits that price or a more favorable one will the trade be executed.
The Limit orders option does not ensure rapid execution, but it does shield you from selling for less or paying more than you had planned. For instance, you can lose out on a chance if the price never reaches your limit in rapidly moving markets.
2. Trade in Highly Liquid Markets
The ease with which an asset can be purchased or sold without materially altering its price is referred to as liquidity. Bid-ask spreads are typically tighter, and there is less slippage in highly liquid markets, like Bitcoin or Ethereum trading pairs on large exchanges.
Selecting assets with robust liquidity pools guarantees that your orders will be filled promptly and at prices that are more in line with your expectations. The depth of an asset’s order book and its 24-hour trading volume can be used to assess its liquidity.
3. Avoid Trading During High Volatility Events
Volatility spikes are frequently caused by significant news announcements, economic data, and abrupt market movements. For instance, the release of the U.S. Consumer Price Index (CPI) data often results in significant fluctuations in the price of Bitcoin and other cryptocurrencies. Slippage is especially possible at these times because cryptocurrency prices can fluctuate significantly in a matter of seconds.
Since it might be challenging to forecast short-term market swings, avoid opening new positions during these periods of extreme volatility if your approach permits. Rather, hold off on making deals until the market has stabilized.
4. Break Large Orders Into Smaller Trades
If there is little liquidity, large orders may affect the market price of the asset you are trading. For instance, your trade order will probably raise the price of a just-launched memecoin if you’re purchasing $10,000 worth of it.
As a result, many traders may decide to sell in order to profit, which would lower the price and leave you losing money. Instead of placing a single, big order, divide it up into smaller trades that are carried out over a longer time frame.
Order slicing is a technique that helps you obtain a better average price and lowers the possibility that your order will have a major impact on the market.
5. Choose the Right Exchange
When it comes to order execution, not all cryptocurrency exchanges are created equal. Certain platforms provide improved liquidity, quicker trade matching engines, or sophisticated order types that reduce slippage. Examine several exchanges, such as CEX or DEX, and select one that is renowned for its competitive spreads, deep liquidity, and low latency.
The spread in trading is the difference between an asset’s purchase and sale prices. A broad spread denotes poor liquidity and a greater disparity between the two prices, whereas a tight spread denotes high liquidity and significant trading activity.
Trading volume is a useful measure of the popularity of DEXs. Your trading performance may be significantly impacted by this choice.
More Ways to Manage Slippage
For every swap, the Uniswap Web App and Wallet determine the approximate slippage. Additionally, you have more control over how much price movement you’re willing to accept by setting your personal maximum slippage tolerance before confirming a trade.
Here are some things to think about while manually controlling your slippage tolerance:
1. Assess Pool Depth Before Swapping
To determine whether or not your deal could impact the price, find out how much liquidity there is in the pool before you hit swap. To see market-depth charts and pool sizes, go to the Pools page on the Uniswap Web App. A larger risk of slippage may be indicated by thin liquidity.
You can divide your swap into smaller portions if you’re swapping a lot. In this manner, every piece accesses the deepest pools without significantly changing costs.
For instance, trading $10K in a pool with $200K will cause a greater price movement than dealing $10K in a pool with $20M.
2. Trade During Non-Peak Times
When there is a lot of volatility or gas congestion, slippage tends to increase. You can obtain more reliable pricing by trading during slower times, when gas prices are lower, or markets are less volatile.
You can assess network conditions and determine whether it’s time to switch by using tools like Gas Estimator.
3. Use Limit Orders When Available
Instead of accepting the current market price, limit orders allow you to specify the precise price you’re willing to trade at.
This keeps you from being filled at lower costs during abrupt price fluctuations. Limit orders for specific pairs are supported by the Uniswap Web App.
4. Route Swaps Through Am Ms with Deep Liquidity
By aggregating billions of dollars’ worth of liquidity over thousands of token pairs, automated market makers (AMMs) like the Uniswap Protocol assist lower slippage and enhance pricing consistency for swaps of all sizes.
AMMs contribute to the efficiency of every swap by providing deep liquidity across networks.
Closing Thoughts
Although slippage is an inevitable aspect of trading, it need not be a significant barrier to success. You can greatly lower your exposure to this risk by utilizing limit orders, trading in liquid markets, avoiding high-volatility events, dividing big deals into smaller ones, and selecting the appropriate exchange.
In the end, you can safeguard your earnings and trade with more confidence if you consistently pay attention to your execution approach and the state of the market.
