How to cope with slippage risk in trading

A common problem encountered during trading is that the final transaction price does not match the expected price. This phenomenon in Crypto Assets trading is known as проскальзывание (Slippage). When investors place market orders, if the liquidity of the counterparty is insufficient or the market experiences significant Fluctuation, the order may not be fully executed at the initially expected price, resulting in additional costs or unexpected gains.

The Fundamental Cause of Slippage: Bid-Ask Spread

Understanding slippage is key to mastering the concept of the bid-ask spread. In any trading pair, there are two prices: the highest price the buyer is willing to pay (Bid) and the lowest price the seller is willing to accept (Ask). The difference between these two prices is the bid-ask spread.

The stronger the liquidity of the market, the larger the order volume participating in the transactions, and the smaller the price spread—such as mainstream assets like Bitcoin, which typically have a narrow price spread due to high trading volume. Conversely, for small coins or assets with few trading pairs, the price spread can be quite wide.

Slippage in Actual Trading Performance

Assuming a trader wants to buy a Crypto Asset worth $100 at the market price. However, there is insufficient liquidity in the market, and the system needs to execute trades layer by layer from multiple price levels. As a result, the final average price reached $102, which is 2% higher than expected. This $2 price difference is the negative Slippage—the additional cost incurred by the trader.

It is worth noting that slippage can also work in a favorable direction. Under certain market conditions, traders may complete orders at a better price than expected - this is known as positive slippage.

Practical Solutions to Reduce Slippage

Batch ordering is the simplest strategy. Splitting large orders into multiple smaller orders for execution can significantly reduce the impact of each order on the market, thereby mitigating the effects of slippage.

Setting acceptable slippage range is a feature offered by many decentralized exchanges and DeFi platforms. Traders can preset a slippage tolerance (for example, 0.5% or 0.1%), and trades will only be executed if the actual execution price is within this range; otherwise, the trade will be automatically canceled. However, it is important to note that a too-low tolerance can lead to trades often not being executed or being canceled, while a too-high tolerance exposes traders to undesirable price risks.

Choose Limit Orders Over Market Orders Although limit orders execute more slowly, they allow traders to precisely control the execution price, completely avoiding the negative effects of Slippage. However, the trade-off is the risk of orders never being executed.

Focusing on market liquidity is equally important. Trading during periods of ample liquidity or selecting trading pairs with better liquidity can naturally reduce the probability and magnitude of slippage.

Summary

Understanding and managing Slippage is crucial for rational trading in the crypto market. Whether using market orders or limit orders, and whether trading on centralized exchanges or decentralized platforms, learning to identify the risks of Slippage, setting reasonable tolerances, and adopting corresponding avoidance strategies can help traders protect their capital in a fluctuating market. Especially for users new to the DeFi space, mastering these basic concepts will greatly enhance the success rate and capital efficiency of trading.