In the world of trading, surely you often hear about slippage. Literally, slippage means to slip due to a slippery surface. This condition is common for traders and investors when transacting on the exchange. Basically, slippage is a common phenomenon in almost all investment instrument markets. Starting from equities, money, bonds, futures contracts, stocks, to crypto assets.
This condition can occur due to various factors. However, the factors that most often influence price changes are the level of supply and demand for assets. In addition to demand and supply levels, major events and market sentiment also affect asset prices. This price change is generally avoided by investors and traders to maximize their investment profits.
Find out more about what slippage is and its dangers in the following review.
What is Slippage?
Slippage is the difference between the expected price and the price used when buying and selling transactions take place. The price difference condition, which is often dubbed as slippage, can occur at any time, but most of these conditions occur when market volatility is high and users use market orders more.
Slippage can also occur when it occurs when there is a large purchase or sale. However, when an asset order is executed, the asset volume available to maintain the bid/ask spread is insufficient.
When making transactions on the exchange platform, you of course expect the buying and selling numbers of transactions to match the price that took place when the transaction was made. However, this is often not the case due to the highly volatile volatility of the crypto asset market. Because, the difference in the price of crypto assets can change every second.
When slippage occurs, both traders and investors inevitably have to accept the price difference that occurred during the transaction.
Examples of Slippage Cases in Crypto Assets
There are two types of slippages, namely positive and negative. Positive slippage occurs when you buy a crypto asset at a lower executable price than when you click on a transaction. As a result, you get more profit than you expected.
Conversely, if the execution price is more expensive than when you click, then the condition is known as negative slippage. Because the price increase will reduce your profit.
Here are some examples of slippage that is common in the investment market, one of which is crypto assets:
◾ Normal (No Slippage)
You submit a purchase of crypto assets for IDR 70 thousand for IDR 350 thousand. When executed, you get the crypto asset for IDR 70 thousand and manage to buy 5 coins.
◾ Positive Slippage
You submit a purchase of crypto assets at a price of IDR 70 thousand for IDR 350 thousand. However, when executed, you get the crypto asset for IDR 69 thousand and manage to buy 5,072 coins. This means that you get a better price and more crypto assets than you expected.
◾ Negative Slippage
You submit a purchase of crypto assets at a price of IDR 70 thousand for IDR 350 thousand. However, when executed, you get the crypto asset for IDR 71 thousand and can only buy 4,929 coins. This means that you get a higher price and fewer crypto assets than you expected.
How to Avoid Slippage
When trading, it is recommended that you enter a transaction value limit. For example, you want to buy Bitcoin. Make sure you use the limit order feature on the exchange platform you are using. You will have a minimum and maximum price standard limit. That way, purchases beyond the maximum price will not be executed.
This is known as the enter strategy. At this time, you calculate the capital that you can spend with the amount of profit you are after. The same is true if you want to sell your crypto assets. If this is the case, then the condition is known as an exit strategy, which is the stage where you have set your sales profit target.
◾ Limit Order
As mentioned earlier, this limit order feature can minimize losses caused by slippage. For example, if you want to buy ZMT on the Zipmex platform, you can enter your maximum purchase amount. If you have prepared IDR 2 million, your purchase will automatically be IDR 2 million or below.
Unfortunately, this feature also places limits on highly competitive traders. Because, this feature allows users to miss the moment of purchase with the best value.
To overcome this, you can use the following methods so that you can maximize the use of the limit order feature.
- Enter a limit order according to the capacity and funds that you have allocated. Both for buying and selling a certain crypto asset on the exchange platform of your choice.
- Use a stop-limit order to quote an asset according to the allocation of funds that you have prepared. If the conditions allow, then the purchase of your crypto assets will be carried out without a hitch. It’s just that, if the conditions are not right, your purchase will not succeed and even close your chances of getting the maximum profit.
- Use stop-loss orders to minimize losses when the asset price declines. Set a maximum reduction limit to prevent the value of your portfolio from dropping drastically. When the asset price drops below your standard limit, your asset will be immediately sold.
◾ Slippage Tolerance
Slippage tolerance is a term that refers to the slippage limit of the coin/token price that you can tolerate. By using this feature, you can set a limit on the price movement of tokens that you can receive, either higher or even lower than the price displayed on the interface.
One platform that provides a slippage tolerance feature is PancakeSwap. Although the default slippage tolerance set by PancakeSwap is 0.5%, users can still set whatever % of the maximum price movement they can accept.
The Impact of Slippage can be Reduced by Choosing the Right Trading Strategy
The important thing to understand is that slippage conditions may be unavoidable. The volatility of the crypto asset market does have a very significant impact. The change from time to time is also very high. Even so, crypto slippage is a normal condition, don’t let this condition discourage your trading.
Therefore, the impact of negative slippage can only be minimized. By monitoring transactions and market conditions and using the right strategy, your profits can be maximized properly. Make sure you use the right strategy at the right time so that your profits can increase gradually.
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