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Consider this scenario: you walk into a toy store and see a popular toy on sale for $20. You decide to buy it and proceed to the checkout. However, the cashier informs you that the actual price is $25, not $20 as advertised.
While such occurrences are impossible in physical stores, they happen frequently in the world of cryptocurrency exchanges. Cryptocurrency traders expect their buy or sell orders to execute at the price they've agreed upon. Unfortunately, sometimes the transaction happens at a different price, and this is referred to as slippage.
Slippage in cryptocurrency refers to the difference between the expected price of a crypto asset and the actual price at which the trade is executed. There are two primary reasons why slippage can occur in the world of cryptocurrency: liquidity and volatility.
When cryptocurrencies experience rapid price changes due to frequent trading, they are considered volatile. In this situation, slippage can occur due to wild price swings, resulting in a trading order being executed at a different price than expected. Cryptocurrencies are speculative instruments, and a single headline or tweet can trigger a significant increase or decrease in price.
The lack of liquidity in some cryptocurrencies can also lead to slippage. Some cryptocurrencies are popular and frequently traded, while others are not traded very often due to their newness or lack of popularity. This can cause a significant difference between the lowest ask and the highest bid, leading to dramatic changes in price as an order is entered and executed.
Illiquid assets cannot easily be converted to cash, and cryptocurrencies that are not popular have limited buyers, leading to slippage. If there are no willing buyers, a seller may have to hold onto their cryptocurrency longer than anticipated, and the eventual price a buyer is willing to pay may be lower than what the seller wants to sell for. This lack of buyers can result in a sudden jump in the market price due to a single transaction.
Slippage tolerance is the max price difference a trader accepts between expected and actual execution price. It's crucial in volatile markets like cryptocurrencies. A low tolerance can miss opportunities, while a high one can cause big losses. It varies based on strategy, risk appetite, and market conditions. Traders use stop-loss orders to manage risk by closing positions at a certain price level.
Positive slippage occurs when a trade is executed at a better price than expected, resulting in additional profits for the trader.
In contrast, negative slippage occurs when a trade is executed at a worse price than expected, resulting in reduced profits or even losses for the trader. Understanding the concept of slippage and how to manage it is crucial for successful trading.
There are several strategies that traders can use to avoid slippage and execute trades at the expected price.
This difference between the expected and actual price is known as slippage. Slippage can occur in both bullish and bearish market conditions and is especially prevalent in...
Secondly, the presence of whales, individuals or groups that hold a large amount of a particular cryptocurrency, can cause market volatility. When whales hold their...
Liquidity is important because it enables traders to enter and exit a position with minimal slippage, which is the difference between the...