In an unstable market, slippage occurs relatively often. There are several types of this phenomenon:
positive — the order is executed under more favorable conditions than the investor originally planned. For example, buying cryptocurrencies at a price lower than expected, which brings the user potential profit;
negative - the transaction is made at prices that are unfavorable for the investor. Sometimes the user may suffer significant losses, so the risk of slippage should always be calculated in advance.
Methods for assessing slippage
When trading, a trader needs to take into account the risk of slippage and be able to assess it in order to correctly calculate the potential profit when placing and executing an order.
To begin with, the investor determines the level of slippage acceptable to him/her. This is the maximum price difference, expressed as a percentage, that suits the trader when making a transaction. Many large exchanges have this function and are usually referred to as slippage tolerance. Such tools ensure that transactions are not made at prices that are unfavorable for the trader.
For example, a user plans to buy Bitcoin at a price of $59,000 with an acceptable slippage limit of 0.5%. We calculate using the formula: 59,000 x 0.005 = 295.
Therefore, slippage could cost the investor $295.
During periods of high volatility, a higher slippage tolerance may be required to execute orders.
You can also use a simple formula to calculate the slippage percentage. To do this, subtract the order execution price from the current market price of the asset and divide the result by the current price.
