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Slippage: Definition, Functions, and How to Avoid It

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Slippage: Definition, Functions, and How to Avoid It

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Slippage is basically a common term in trading, including crypto assets investment.

When investing, people often face situations when investments in certain products or assets do not turn out as expected, that’s called slippage.

In this article, we will discuss thoroughly about slippage in crypto trading. Check out the review below.

What is Slippage in Trading?

As mentioned above, slippage in trading is a condition when there is a gap between the expected price and the actual price when the trade was executed.

This often happens when you use market orders to buy or sell assets. In fact, slippage can occur at any time, but this condition is usually caused by high levels of market volatility and/or low liquidity.

The high level of market volatility is a condition when there is a sudden price change in the period between confirmation and execution of the trade.

In addition, slippage in crypto occurs due to liquidity or a condition when there is not enough crypto available at a quoted price to meet demand. Typically, large requests will be more prone to slippage due to liquidity issues.

Get to know Slippage Tolerance

Besides slippage, there is also slippage tolerance, which means the amount of slippage or price difference that can be accepted by investors. This term refers to the amount of coin/token price traders can tolerate.

By using this feature, you can set a limit for acceptable token price, either higher or lower than the price displayed on the interface.

Generally, slippage tolerance is specified as a percentage of the total swap value. For example, some users might set slippage tolerance at levels of 2%, 5%, or even 10%.

Slippage Tolerance Functions

For a crypto investor  it is important to set a slippage tolerance limit. Here are some important slippage tolerance functions to know.

  1. Setting Maximum Amount of Slippage

The first function of the slippage tolerance feature is to set the maximum amount of slippage that can be accepted by investors on an exchange platform.

This will really help investors to plan and create an investment portfolio that can maximize their profits.

  1. Avoiding High Slippage Payouts

Another function is that it can be used to prevent too high slippage payments.

In this regard, if the slippage that occurs is higher than the specified slippage tolerance, the transaction will not happen.

Strategies to Avoid Slippage

  1. Buying and Selling

First, when trading, investors are advised to enter a transaction value limit. For example, when you want to buy Bitcoin, make sure to use the limit order feature on the exchange platform you are using.

You will have a minimum and maximum price standard limit so purchases beyond the maximum price will not be executed, which is called “enter strategy”. At this time, you should calculate the capital you want to put into the asset with the desired profit.

The same goes with selling your crypto assets. It is known as an “exit strategy” or the stage when you have set a profit target.

  1. Limit Order

As explained earlier, this limit order feature can reduce losses as a result of slippage. For example, if you want to buy Bitcoin on the Indodax platform, you can enter the maximum amount for your purchase.

If you have prepared IDR 2 million, your purchase will automatically be at IDR 2 million or below. However, this feature also puts a limit on highly competitive traders as it allows users to miss buying moments at the best value.

That’s a review about slippage that you need to know. Also check out the latest articles about other crypto assets only at Indodax Academy.

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