Slippage is the difference between the expected price of a trade and the actual execution price. It is especially common in highly volatile or low-liquidity markets such as cryptocurrency markets. Due to the inherent volatility of crypto markets, rapid short-term price movements may cause traders to experience slippage.
Causes of slippage in cryptocurrency markets
- Insufficient or poor liquidity on the trading platform
When a trading platform has insufficient liquidity, placing a large market buy order may not be fully executed at the expected price. Suppose a user wants to buy 100 BTC at a unit price of 20,000 USDT at a certain moment, the following may occur:
A 40 BTC order is matched with a sell order at 20,000 USDT.
A 30 BTC order is matched with a sell order at 20,001 USDT.
A 30 BTC order is matched with a sell order at 20,002 USDT.
In this case, the average execution price rises to 20,000.9 USDT, which is higher than the original order price (20,000 USDT), resulting in a slippage of 0.9 USDT.
- High market volatility
Due to the high volatility of the cryptocurrency market, if the market price changes after a user places an order, slippage may occur.
Assume the same buy order is placed as in the example above. At the time of order placement, the order book shows a BTC bid/ask of 19,990.5/20,000 USDT. Due to market fluctuations, prices may change rapidly within seconds before the order is executed. Or, large orders impact the market and provide signals to high-frequency traders, giving them an advantage in front-running.
Before the above order is filled, high-frequency trading in the market may cause rapid price movements, resulting in the bid/ask shifting to 20,000.5 USDT/20,001 USDT. The above order is then executed at 20,001 USDT, meaning the cost increases by 1 USDT per BTC, resulting in a total slippage of 100 USDT.
How to avoid slippage
- AlphaX exclusive Guaranteed Price feature to prevent slippage losses
If you do not want to accept trading slippage, you can enable "Guaranteed SL" when placing a stop loss order to ensure execution at your expected price. The AlphaX Guaranteed Price feature applies not only to conditional orders, but also supports guaranteed pricing for stop loss orders.
Currently supported trading pairs include BTC, ETH, XRP, SOL, LTC, BCH, ADA, BNB, MATIC, RNDR, DOGE, and LINK. More pairs will be added gradually, stay tuned.
Recommended reading: Trade with confidence, The Guaranteed Price feature is now live
- Use limit orders instead of market orders
Unlike market orders (orders executed at the best available price), a limit order is placed at a pre-set price and is intended to execute at that price. However, this does not guarantee that the entire order will be filled at the set price, it may only be partially filled.
- Choose your trading platform carefully
Slippage is common in the cryptocurrency trading, whether you are an institutional or an individual investor. AlphaX understands that trading costs are a primary concern for users, and is committed to connecting with high-quality liquidity providers to enhance market liquidity and offer you the best bid and ask prices. Additionally, trading during more stable market periods can significantly reduce the possibility of orders partially filled at the set price, further lowering the risk of slippage.
- Split large orders into smaller ones
Large orders tend to have longer execution delays and consume more liquidity, which increases the risk of slippage. To prevent slippage caused by a single large order, you can consider splitting it into several smaller orders, spreading execution over time, and trading across different platforms to better manage slippage risk.
Additionally, algorithmic trading strategies such as Volume Participation (VP) or Time-Weighted Average Price (TWAP) can help optimize execution timing and price, reducing slippage risk.
If you have any questions or feedback regarding asset liquidity during perpetual trading, feel free to contact us.