Sometimes your trade doesn’t get filled at the right price and you end up losing out on this situation, why is this and what is slippage in crypto? This is a very frustrating fact about how matching engines work and how your trade gets filled by the trading algorithm of a crypto exchange. What can we do about this and how do we perhaps avoid it altogether? In this educational guide, I will try to explain the definition of what slippage is, how it works, how to minimize the damage, how to calculate your slippage and the meaning of positive and negative slippage. After reading this guide you should have a basic understanding of this concept and also know what to expect when trading the cryptocurrency markets.
Simply knowing what it means is not enough to be able to reduce the damage so today I will give you some handy tips you can use if you realize that you experience higher than normal levels of slippage in your crypto trading. Did you know that there is a difference between positive and negative slippage? This is something that exists but few traders know what it means and even less how to calculate it. Stick around and learn the ins and outs of slippage in cryptocurrency trading.
- The meaning of slippage in crypto
- How it works
- How to minimize slippage
- How to calculate crypto slippage
- Positive and negative slippage
What does slippage in crypto mean
Slippage in crypto means price difference in the expected trade execution and the actual trade execution and happens when there is a flaw in the underlying conditions of the market you trade. Now, slippage can occur for a couple of reasons but some of them are more common than others and you should pay attention to when you are trading to figure out which one it is. Some of these reasons are easy to deal with while others are more difficult. Below is a list of the most common reasons why slippage occurs:
- Internet Connection
- Malicious Actors
I will try to explain how these different aspects of trading can have a big impact on where and how your trades get executed and depending on your problem you should find a solution to the problem and learn how to go around it to not experience this issue in the future. You can combat all of these factors by choosing the coin you are looking to trade. For example, if your coin experiences increased volatility, pick another coin. If the liquidity dries up, swap broker. If your internet connection is poor, use your mobile network or change the internet company. If your exchange seems to be doing something weird, pick another.
How does slippage work
The easiest explanation of how slippage works in crypto trading is that when you enter the market with a market order or limit order your order gets executed, or “filled”, at another price than you intended to enter at. For example, if you buy Bitcoin at the price of $48,800 and your order gets filled at $48,850, there is a slippage of $50 for your order. These $50 is what you lose on the position and you will not get it back. The same thing can happen when you sell your Bitcoin back to the market.
Volatility is one of the most common reasons for slippage in crypto. When the market experience very big fluctuations at a fast pace, the order books on the exchange take one big swing and it becomes difficult for matching engines to handle the flood of orders. It is very common for some orders to get stuck above or below market price if you choose to enter with a limit order. If you choose to enter with a market order, on some occasions you will get filled at completely off numbers due to high volatility. For example, if the market is moving quickly and you are buying Bitcoin at $48,800, you can get filled as much as $200 above the market price if you enter with a market order.
Liquidity is another reason why slippage occurs when trading digital assets. This usually happens when you enter the market with a market order. The market order is designed to get you in at the market price, the first buy or sell price in the order book. If your order is larger than the matching orders in the order book there can be a slippage when the matching engine chooses the next order in line.
A bad internet connection can mess up your orders in a big way. If you are trading with high latency your orders can fall behind in the matching system of the exchange. Since the orders will get processed somehow, even if the latency is high, you will experience slippage where the orders get filled at completely different prices. This only happens with market orders though, if you are entering with a limit order you should not have this problem because your order is already registered.
The fourth reason is sadly bad-acting crypto exchanges that try to rip you off by adding a price slippage to the matching engine. This will cause your positions to always be out of price and no matter how much you try, even with limit orders, the positions will get filled at the wrong price. I must say that this is not very common, especially if you trade on a reputable exchange but it has happened in the past.
How to avoid and minimize slippage
Now, you have learned the most likely causes of miss-priced entries for your positions and you want to know how to avoid it going forward. I have good news, there are ways for you to avoid almost all kinds of slippage if you have time to make some planning before you start trading. I will go through each reason of slippage that I gave before and tell you exactly how to minimize the damage.
- Volatility – If your market is experiencing higher than normal volatility you can either look to change coin to one that is not as “hot” at the moment. Volatility is needed for all traders to ensure good gains but not to the extent that it is hurting your positions. If your cryptocurrency is too hyped and too volatile at the moment, swap coin, or wait it out. There will be several periods during the day when the volatility falls and this is your time to enter.
- Liquidity – The way you combad low liquidity is simply to change your crypto exchange for another. It is highly likely that your exchange will have low liquidity if it is a small exchange. Try a bigger and more popular exchange and you’ll see that you won’t experience this issue. Try on of these crypto exchange with good liquidity.
- Internet Connection – Should your internet connection be poor and you are unable to execute positions at your desired prices you are can always change to a mobile 5G internet connection, restart your internet router, or simply avoid trading that day. Bad internet connection can be due to several reasons and if you normally have a good line you should just wait it out. If your internet connection is always bad I recommedn talking to your internet company about un upgraded plan for faster internet.
- Malicious Actors – In today’s age of crypto trading there are crypto exchanges that cannot be trusted and they add a price slippage to your orders without you knowing it. If you experience slippage over and over again and it is not due to volatility, liquidity, or internet connection, then I recommend that you change your broker. Check this list of the most trusted crypto exchanges on the market.
Example of slippage in crypto
Here is an example of what slippage might look like and how you can detect it. Let’s say that you are trading XRP and the price is traded at $0.8124 and the first sell order in the order book is at $0.8128. You buy at the market (with a market order) and get filled at $0.8135, then you have had a slippage of $0.0007. This is too much slippage for high-quality crypto exchange and it should not be accepted. The same thing can happen if you short-sell XRP at the same price of $0.8124 with a market order and the first buy order is at $0.8120. If your order gets filled at $0.8114 then your position has suffered from slippage. Almost all high-quality crypto exchanges that have a modern matching engine (which 99% do have) will not give you this order execution unless there is an outside factor.
In this example, the price slippage was kind of small but it adds up if you are trading a lot of sizes. Small traders who buy and sell amounts less than $1000 won’t notice the loss that much but if you are an active day trader or a large investor who have a daily turnover of more than $100,000 you will start to notice that you are paying more than you should for your digital asset and then it’s time to do something about it. Just keep in mind the most common reasons for this and take the right precautions to avoid them.
How to calculate slippage
It is very simple to calculate your slippage in any market, no matter the price or coin. Simply take the expected price that you want to enter at and subtract the actual price you entered at. Below is an example of this calculation where we are buying Bitcoin at $48,500:
Expected entry price: $48,500
Actual entry price: $48,570
Slippage calculation: $48,500 – $48,570 = -$70
In this calculation, our slippage turned out to be $70. You can do your calculation as long as you know your expected entry price and your actual entry price. Keep in mind however that slippage in small amounts is normal. If you trade Bitcoin and you get slippage from $1-$5 you should not be too worried as this can happen in the cryptocurrency market.
Positive and negative slippage
The most common type of slippage is negative slippage where the position gets filled at a worse price than expected and you have to pay for the error. However, on some occasions, there can be a positive slippage where you get filled at a better price than expected and you earn a small profit completely free of charge. This happens only on rare occasions and is caused by other traders who fill the order book too fast or due to an in-house problem with the cryptocurrency exchange. This is not something to count on to happen frequently as it is a very rare situation, however, when it does happen, take your extra gains and smile.
Other traders also ask
No, it is never good to experience slippage as you are the one losing out on the trade.
It is essentially a difference in the expected entry price and the actual entry price of your position. If your position gets filled at another price than you entered as a limit order, then you have experienced slippage.
You should always expect a small amount of slippage but anything more than 0.25% per position is too much.
0.25% per trade is a general rule of thumb and you should not experience higher levels than that.
It can never be too low. If your experience low slippage it means that your crypto exchange has high liquidity and the market is experiencing normal levels of volatility.
Yes, when your trade gets executed at the wrong price the money is taken directly from your account balance.
It means that your trade gets miss priced by 2% and your entry price is 2% off of your expected entry price. This is a bad execution and you are losing 2% just by entering the market.