The market place is all about calculated risks. And one of those risks is the cost of slippage, which is why this article explains the best ways to deal with slippage whether you are trading cryptocurrencies or traditional assets.
Slippage is when there is a price difference from the amount of the original market order and the actual price paid of a stock. Slippage can, and does, happen in any trade situation, and occurs to both cryptocurrency and traditional assets. The price change of the slippage can be for more or for less than the original market order.
Why does slippage happen? It happens because the bid-ask spread changes from the time the order was placed to the time the order is completed.
Slippage is a regular market phenomenon and occurs in all kinds of markets, be they equities, currencies, bonds, futures or cryptocurrency. Sudden price changes usually occur with major news events, and with certain trading seasons.
One way to avoid slippage is to try and avoid buying or selling at a volatile time. But investors can also set limits on their orders, using limit orders, to avoid paying more than they wanted to.
It is important to remember that cryptocurrency is a digital asset, and therefore behaves in a similar way when it is being traded. That means that slippage occurs in comparables ways when it is traded. And likewise, it is also possible to avoid slippage with cryptocurrencies using similar trading strategies.
We will discuss all of these relevant elements of slippage in this article.
Market order: A market order is a position or price at which you enter or exit a sale. If you enter the sale you are the buyer, if you exit the sale you are the seller.
Slippage: Slippage can occur in either direction, which changes the cost for either the buyer or seller.
When Does It Happen?
It’s possible for slippage to happen at any time between the time that the order is placed, to the time that the order is executed. High volatility is the most substantial cause of slippage. Another reason for slippage is that there is not enough volume to fill all of the market orders.
As a result, the spread between the bid-ask is greater; that is, there is a high demand, which drives up the purchase price. However, slippage can also happen the other way, where you place an order to buy Stock D at $4.75 and you buy it at $4.50.
All slippage is, is the price change from the time the order is placed, to the time that it is filled.
What does It Mean?
Slippage means that a market order is not a guaranteed price for the purchase or sale of a stock. Because slippage is a value or purchase change in the final price you either pay or sell a stock for.
When you want to buy or sell, you must place an order to do so. That means if you want to buy Stock D for Price X, let’s say $5, you place that order. However, by the time the sale actually goes through, the price may actually go up, to $5.25. Now, bear in mind, this happens within a few short minutes -which is what makes it seem so stressful.
There are ways to mitigate slippage, however.
Buying and Selling/Entering and Exiting
There are ways to reduce the effects of slippage, and that is with a limit order. With a limit order, the buyer places a limit at which they will enter a trade.
For example, the trader can place the limit order to buy Stock D at $5.10. That means only at $5.10 or lower, will the order be executed; the order is only filled when the limit is met and if there is supply enough of the stock at that price.
The potential drawback is that the trader misses an order because of the limit because If and Only If the price of the limit is met will the order go through. This is a perfectly smart strategy for your normal sauce everyday traders.
Limits, however, present a real limitation to the more competitive day trader because it is possible to miss a purchase with this kind of order. So, the only buy that guarantees the purchase of a stock is with a market order, but then, there is no guarantee of the price you will enter at because of, you guessed it, slippage!
If you can place your order using limit orders, then this is the best way to avoid slippage. And slippage can have a real effect if you are buying 100 or 1000 shares of one stock.
Placing Orders with Limits
If you are the buyer, then there are a few orders or order strategies that can be used to avoid the costs of slippage; paying more than you had planned on.
Limit orders are placed for a specific maximum price to buy a stock. Let’s say you will only pay $5.50 for Stock D. So you place a limit order for the stock, then if Stock D ever meets that price, or drops below it, then the buyer will go through.
Another strategy to avoid slippage is to use are stop-limit orders. This is another kind of conditional trade, that means, only if your conditions are met, will the trade go through.
While stop-limit orders and limit orders both avoid the cost of slippage, they are not guaranteed buys. That means that you will lose the stock you wanted because you couldn’t get the right price.
Of course, slippage also has an effect on the current owner of a stock. It can work in their favor, or it can work against you, if the slippage is negative, or your stock is losing value.
To avoid major problems suffered by a holder, one can use stop-loss orders. This is when a price is set which signals the immediate sale of a stock. So, if Stock D drops below $4.50, it will be sold. This technique avoids holding on to losing stocks.
Don’t Sweat if You Let a Little Slip
It is important to remember that slippage is just another part of the exciting world of finance, it is not necessarily a good or bad thing. There are a number of factors that may cause slippage.
Also, any price change from the time the order to buy or sell is set and the difference of the actual order qualifies as slippage.
It is simply that when a market order is placed the most favorable price that is offered by the exchange or other market-maker is accepted.
Thus, the final execution price compared to the intended execution price gets categorized as either positive slippage, no slippage and/or negative slippage.
Can You Totally Avoid Slippage
The bottom line is that when it comes to cryptocurrency or traditional assets, there is no way to completely avoid slippage; this is simply for the fact that prices change is the market every minute of every day.
As I mentioned, you can mitigate the extremes of slippage with different types of orders, but by using these strategies you are not guaranteed a sale or purchase. Most exchanges now offer multiple ways to buy or sell your cryptocurrency. All of these methods come with a fee. If you are interested in learning about some top exchanges, then check out our article about exchanges on the blog.
These methods for sales are totally transferable to the crypto-sphere.
Moreover, news, analysis, new projects, and failed projects have an effect on the markets, so does weather and time of year. Before you buy or sell, ask your self why you are making this move, and if you need to make it now.
Especially if you are organizing your own portfolio, it is very difficult to move with the big sharks that have qualitative traders or mutual funds or whales who are buying up the farm. If there has been a lot of volatility in the market, if you can hold off on making any serious moves, then this is what may be best.
Final Thoughts on Slippage in Cryptocurrency Trading
At the end of the day, slippage is nothing to stress over, especially if you are not making large trades of highly volatile cryptocurrency or traditional assets. But as you likely know, Bitcoin and other cryptocurrencies are quite volatile, which means that using limit orders and stop limits orders to get the price you want can be very helpful.
With traditional assets, you will likely have a person or market service where you can place limit orders with. Cryptocurrency is very similar, except that most things are done directly through cryptocurrency exchanges. The exchanges will offer limit orders or stop-loss orders, and there will likely be a fee for them.
The other difference with cryptocurrency is that different market factors other than those which affect traditional markets will have an effect on their values. That means when you are ready to buy or sell it is important that you do some of your own research and analysis.
While news and new projects and blockchain collaborations are important factors that will affect the value of a certain cryptocurrency, exchanges also offer lots of charts and analytics to help you understand the movement in the market.
If you want to avoid slippage, as I have already said, wait until the market is less volatile, and there the seas are a little calmer. That way you will have better luck getting the cryptocurrency you want for the price you are willing to pay.
- Slippage is a very common thing when it comes to trading.
- Slippage denotes any price variance in the market order and the actual entry or exit price.
- The largest amount of slippage occurs while the markets are volatile.
- Limit orders, stop-limit orders, and stop-loss orders are all ways to limit the spread between the ask price and the sale price but are not guaranteed purchases because if the desired stock does not meet the limit of the order, the sale will not go through.
- The only guaranteed purchase or sale of a stock is with a market order. However, market orders only guarantee that the stock will be purchased, and not at what price it will be bought at.
- Avoiding slippage is particularly important when making large orders because then the difference in cost adds up.