Sometimes, the order may execute at a higher price, and another time, it may be lower.
This occurrence is called price slippage.
But why does slippage occur, and how can you avoid it?
What Is Slippage?
Traders usually trade with specific prices in mind.
You wont just open a chart setup and trade without any reason or goal.
When slippage occurs, you will have to settle for a price other than the preferred price you ordered.
Slippages can be positive or negative based on their effect on your trades.
Negative slippage is the exact opposite of positive slippage.
The price change puts your order at a worse price than you initially ordered.
In this case, your trade was executed at a lower price.
What Causes Crypto Trading Slippage?
Price volatility and low liquidity are the two major causes of slippages in the crypto market.
Price Volatility
The crypto market is characterized by fast-changing prices of the asset.
Thevolatile nature of the marketmakes orders susceptible to slippages.
The market is easily affected by these factors because it is relatively new.
If a token has low liquidity, there are few buyers and sellers.
The more liquid a market, the lower the chance of large price slippage.
Lets say you want to buy one unit of a crypto asset at $200.
Once you place the trade, it executes at the best price in the order book.
As the price increases to get the order filled, the possible execution price also starts to increase.
This means you will have to pay more to fill the order.
In this case, the best market price is a worse rate.
What Is Slippage Tolerance?
you’ve got the option to control your exposure to slippage by setting a slippage tolerance percentage.
The exchange will not execute the trade if the price slips to $104 or $96.
A high slippage tolerance level will allow your transactions to be completed despite the price swings.
High slippage tolerance percentages, however, can expose you to front-running.
Front-running is an illegal process of capitalizing on information to buy and sell securities in advance.
The attacker sees a pending transaction and then places a much larger transaction before and after the pending transaction.
One way to avoid slippages is to execute trades with limit orders.
Slippages can only occur when you use market orders.
Market orders area throw in of trade orderthat automatically executes at the best market price.
Another way to reduce the effect of slippages on your trades is to trade in less volatile markets.
This may sound impossible since the crypto market is generally volatile and experiences price changes quickly.
Such periods are characterized by extreme price volatility.
There are many cryptocurrencies with low liquidity, and it is difficult to escape slippage when trading them.
