Slippage

Slippage occurs when there is a discrepancy between the intended execution price of a trade and the price at which it is actually filled. This phenomenon is common in financial markets, including cryptocurrencies, and can result in either a more favorable or less favorable price than anticipated.

🔑 Key Factors Contributing to Slippage:

• Market Volatility: Rapid price movements can cause significant differences between expected and executed trade prices.
• Liquidity: In markets with low liquidity, large orders may not be filled at the desired price, leading to slippage.
• Order Type: Market orders, which execute immediately at the best available price, are more susceptible to slippage compared to limit orders, which set a specific execution price.

Types of Slippage:

• Positive Slippage: Occurs when the executed price is more favorable than the expected price.
• Negative Slippage: Occurs when the executed price is less favorable than the expected price.

🏛 Example 1: Slippage in Cryptocurrency Trading

A trader places an order to buy Bitcoin at $30,000. Due to high market volatility, by the time the order is executed, the price has risen to $30,500. The $500 difference represents negative slippage.

🏛 Example 2: Slippage in Stock Trading

An investor intends to sell shares of a company at $100 per share. However, due to low liquidity, the order is executed at $99.50 per share, resulting in negative slippage of $0.50 per share.

📚 References

1. Investopedia - Slippage
2. Corporate Finance Institute - Slippage - Definition, Why It Happens, How To Minimize
3. Ig.com - What is slippage and how do you avoid it in trading?

⚠️ Controversies & Misconceptions

• "Slippage only results in losses." False. Slippage can be positive, providing a more favorable execution price than expected.
• "Using limit orders completely eliminates slippage." Not necessarily. While limit orders can reduce the likelihood of slippage, they may not execute if the market doesn't reach the specified price.

🚀 Conclusion

Understanding slippage is crucial for traders across various financial markets. By recognizing the factors that contribute to slippage and implementing strategies such as trading during periods of high liquidity and using appropriate order types, traders can minimize its impact on their trading outcomes.

Related Terms

• Order Book

  An order book is an electronic list of buy and sell orders for a specific security or financial instrument, organized by price level.

• Liquidity Pool

  A liquidity pool is a smart contract that holds assets to facilitate decentralized trading.

• Just-In-Time (JIT) Liquidity

  Just-In-Time (JIT) Liquidity is a strategy employed in decentralized finance (DeFi) where liquidity providers (LPs) add liquidity to a pool immediately before a large trade executes and remove it shortly after. This approach aims to capture trading fees from significant transactions without exposing the LPs to prolonged market risks.