What is Slippage?
Slippage in finance, especially in (DeFi) and trading, refers to the difference between the expected price of a trade and the price at which the trade is executed. It commonly occurs in markets with high and low but can also happen in any trade due to market fluctuations.
Causes of Slippage
- Market Volatility: Rapid price changes can cause the final trade price to differ from the expected price.
- Low Liquidity: Insufficient trading volume can lead to larger price differences when an order is placed.
- Large Orders: Big trades can significantly move the market, especially in less liquid markets.
- Time Delay: The lapse between order placement and execution in fast-moving markets.
- Positive Slippage: Occurs when the executed price is better than the expected price.
- Negative Slippage: Happens when the executed price is worse than the expected price.
Impact on Trading
- Cost Implications: Affects the cost of transactions, potentially reducing profit or increasing loss.
- Trading Strategies: Requires consideration in trading strategies, especially in volatile or thin markets.
- Limit Orders: Specify a maximum acceptable purchase price or minimum acceptable sale price to control slippage.
- Trading Times: Avoid trading during times of high market volatility or low liquidity.
- Trade Sizing: Breaking large orders into smaller ones to minimize market impact.