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Crypto Slippage and how to avoid it

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Crypto Slippage and how to avoid it
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By CNBCTV18.com IST (Released)

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When you buy cryptocurrency on an exchange, the price at which you place the order is rarely the executed price. This difference between your expected price and the price at which the deal closes is known as slippage.

Crypto markets are very volatile. The price of a token can fluctuate wildly within minutes. In this article, we uncover a side effect of this volatility known as slippage, how it affects traders, and what you can do to protect yourself from its damaging effects.

What is slippage?

When you buy cryptocurrency on an exchange, the price at which you place the order is rarely the executed price. This difference between your expected price and the price at which the deal closes is known as slippage.

The slippage is not limited to the crypto market. It is a concept borrowed from the forex and stock markets. However, due to the volatility of digital assets, this tends to have a greater effect on crypto traders.

How does sliding work?

The time difference between order placement and order fulfillment allows sufficient time for price fluctuations to occur. This fluctuation may be the result of increased demand, increased liquidity, or some news that caused a stir in the market.

In any case, the short interval between the order and its execution is enough for the price of the token to change, leaving the trader to face the consequences. Although prices usually do not fluctuate enough to cause large losses, slippage can have adverse effects when your trading volumes are high and every bit counts.

Types of skidding

1. Positive slip: This happens when the price of the token decreases at the time the order is executed. It ensures you get the asset at a lower price.

2. Negative slip: This kind of slippage worries traders. This happens when the price of the token has increased between the placement of the order and its execution, which reduces the purchasing power of your money.

Both types of slippage also apply when selling tokens on an exchange.

Workarounds

Now that we know what slippage is, how it happens, and its types, let’s learn some ways to avoid slippage and the losses that come with it.

Move away from market orders to limit orders: Market orders will buy or sell tokens at the best available price. This type of order is usually executed immediately, but the price at which it is executed is not guaranteed. On the other hand, limit orders allow you to set the price at which you can buy or sell a token. Every major crypto exchange has the limit order option, where trades are automatically executed when the desired token becomes available at the desired price.

Use slip tolerance: Slippage tolerance is a feature of some of the newer crypto exchanges that allows you to set a percentage of slippage that you can handle. If you’re ok with 0.5% slip, you can add that as a slip tolerance, and the order will pass if the slip is less than that. Otherwise, the order will be automatically canceled. This feature is essential when minute price changes are large or if you are an arbitrage trader and margins are already tiny.

Avoid trading in turbulent times: Whether a major announcement is imminent or the market has feelings about a crash or other event, it is best to avoid trading. The increased volatility could lead to a massive slide and equally painful losses.

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