What is Slippage in Cryptocurrency Trading?
When it comes to the vicious cycle of trading, buying, and selling, everyone faces the rises and falls that come with any trading market. Cryptocurrency is no exception to these value fluctuations. While most digital currency traders are familiar with the highs and lows of cryptocurrency trading, not all are familiar with how these highs and lows occur.
Since no one likes the idea of losing money on an investment, it never hurts to learn about how to avoid massive losses on cryptocurrency exchanges. Many often assume slippage is completely negative, but this isn’t entirely true.
Slippage can be neutral, negative, and even positive depending on the trader’s goals and the market. So the real question is, how does one avoid negative slippage? What is slippage really in cryptocurrency-wise? What should someone look for when predicting future slippage trends?
Slippage: The Price That Might Not Always Be Right for Professionals and Novices Alike
Slippage, in general terms, occurs when currency or other asset’s prices change while an order is being placed. This price change can either be higher or lower at the exit of the trade. It is because of slippage some people can see profit in the markets. Without slippage, no one would really make much on a static market. Slippage is also a good sign of a well functioning market or exchange.
Slippage typically occurs in markets with medium to high volatility. This means when there is an imbalance in the number of trade volumes, prices, sellers, and buyers, the prices will then change to adjust to the next available price on the market.
In cryptocurrency exchanges, there are major types of orders for cryptocurrencies. These orders can be helpful when trying to avoid a certain amount of slippage. For each order, there is a buy and sell such as stop buy and stop sell, limit buy and limit sell, and a market buy and market sell.
These orders are when an order is placed on the books and is usually fulfilled by someone else’s market order. You can set limits for buying and selling which helps prevent slippage. These types of order also have lower fees compared to their market order counterparts.
These types of orders usually attempt to buy and sell at the current market/exchange price. This order will buy or sell current limit orders that are on the market’s books that are immediately available. Slippage occurs when you buy at a higher price and sell at a lower price, this is especially true for volatile cryptocurrencies.
These are orders that are placed when certain price conditions are met. They work in a similar fashion to market orders, but it is on the books like limit orders. Since these types of orders are similar, in essence, to market orders, they also have issues with slippage and fees. Stop sell orders are also known as stop loss orders.
Are There Any Ways to Avoid Slippage on the Cryptocurrency Markets?
There aren’t any ways to completely avoid slippage especially when it comes to cryptocurrency, but there are a few ways in which you can reduce the impact of slippage on your trades. A few of these methods are:
- Using a combination of limit and stop orders with a percentage range of 1 – 3%; guaranteed stops will usually incur a fee compared to other stop loss orders.
- Taking the time to read on any news, opinions, analyses, price trends, and any other bits of information that can impact a digital currencies price. Typically, in markets with high volatility, they are very easy to manipulate with negative headlines, economic announcements, and other influential information.
- Determine the volatility of the cryptocurrency you intend to trade
Final Thoughts on Slippage in Cryptocurrency Trading
All in all, slippage is nothing to be too worried about unless you are making large trades on highly volatile cryptocurrency exchanges. Slippage may also be a small concern for those who are using cryptocurrencies with transaction prices such as Bitcoin.