What Is Slippage Tolerance? The difference between the expected price of a market order and the price at which the trade is executed is referred to as slippage tolerance. It doesn't matter if the difference is negative or positive; slippage is still considered. You can read this article for additional information.
What Is Slippage Tolerance?
Slippage tolerance is the range of prices you are willing to accept between the price at which you place an order and the price at which it will actually be completed. A percentage of the total exchange value is used to determine the tolerance level.
Users of many trading systems can select the level of their tolerance for slippage. Before you place a market order, a slippage estimate and average price are displayed. The standard default rate on most platforms is usually 0.10% to 2%, with the option to Manually adjust it to whatever percentage you like.
How You Can Minimize or Avoid Slippage
Slippage occurs to every trader in the cryptocurrency market and is unavoidable. There are techniques to lessen its impacts, even if there is no way to completely guarantee that your purchase will be done at the price you desire.
Use Trading Platforms With Controls Over Slippage Tolerance
Numerous cryptocurrency trading platforms include settings that limit negative slippage by limiting how much the price of your order can deviate from the tolerance level you've specified.
The price must not move outside of your tolerance for slippage before the transaction is automatically canceled. On the other hand, the exchange will complete the order at a better price if the price changes in a way that is advantageous to you.
Use a platform that has a slippage tolerance setting that can be adjusted as desired. For example, the decentralized exchange Uniswap has a default slippage tolerance of 0.10% that can be manually adjusted.
Utilize Order Types to Minimize Slippage
The best market price is used when placing a basic market order, which is usually sufficient for most traders. For traders who desire more precise control over their operations, there are order types created specifically for them. These order forms are intended to limit volatility risk and control slippage levels:
Limit order: A limit order is a buy or sells order for an asset that can only be filled at the price you specify or higher. The order is not filled if the best available price is less than the limit price you've specified. This order type was created expressly to reduce pricing risks.
Stop-limit order: The limit price, which is the highest price you're ready to pay or the lowest price you're willing to sell, and the stop price, which is the price at which the purchase or sale is triggered, make up this advanced order type. For traders who are price-sensitive and want to reduce the risk of volatility, this order type is appropriate.
Trade Only During Active Hours
The cryptocurrency market is open 24/7, unlike the global stock markets, which are open from 9:30 am to 4:00 pm. Even cryptocurrency trading, though, has peak times that vary by region. By only trading during a region's busiest times, you can reduce your slippage %.
Keep in mind that blockchain transaction fees also go up during busy times due to network congestion. For example, when Ether (ETH) experiences a high transaction volume, the Ethereum network's gas fees also rise to incentivize the miners who confirm transactions on the blockchain.
Minimizing slippage while also paying minimal gas fees for your trades will require some finesse. Fortunately, there are numerous resources like ETH Gas Station that are great for calculating potential gas fees.
Avoid Trading Before Major News Events
Major news events can cause substantial slippage and expose you to more risk than you anticipated. Avoid executing orders during big scheduled news events like a company's product release or new government regulation.
Check an economic calendar to see if there are any big new events planned or data releases related to the crypto market. CoinMarketCal is a good example of an economic calendar for cryptocurrency-related news.
Conclusion:
Slippage is a common occurrence in every market and is an unavoidable part of trading. Although it cannot be entirely stopped, traders are not powerless. There are actions you may do to reduce your exposure.
To lessen the effects of volatility, always trade in assets with plenty of volume and liquidity, and utilize order types with guaranteed limits. Before you execute a market order, many trading platforms also provide parameters for managing your slippage tolerance.
Try to keep trading at times when the market is most active. Be mindful of greater transaction charges, though. Last but not least, constantly monitor the economic calendar to determine if any upcoming news can expose you to more danger.
Think of slippage as the cost of doing business. It can be positive or negative, but it's often an acceptable cost, especially if you want to execute a trade quickly.
