The term Slippage and related concepts are quite important if you trade regularly. Let's learn about Slippage and related concepts with Trading Insight!

Slippage occurs when the average price of a trade is different from the original expected price. It occurs frequently in market execution and is mainly caused by market volatility and insufficient liquidity to execute the trade.

So instead of getting the exact price you want, slippage can make the transaction cost more or less. Traders try to reduce slippage by breaking large trades into smaller pieces or using limit orders that allow them to set a specific price to buy or sell.

Difference between bid and ask price

Understanding slippage is not complete without the concept of bid-ask spread. This spread represents the difference between the highest price a buyer is willing to pay (bid price) and the lowest price a seller is willing to accept (ask price). The spread is affected by factors such as market liquidity and trading volume. Trading pairs that are less affected and lack liquidity are large-cap or top pairs such as BTC - ETH - SOL ....

Example of slippage

Consider a scenario where a trader places a large market order at $100, but the market lacks the necessary liquidity. The order may be executed at a price above $100, resulting in a higher average buy price than anticipated. The difference between the expected price and the actual price is what we call slippage.

Minimize negative slippage

Traders can use strategies to minimize negative slippage:

1. Split large orders: Splitting large orders into smaller orders can reduce the impact of slippage.

2. Set slippage tolerance: Most decentralized exchanges and DeFi platforms allow you to set slippage tolerance (e.g. 0.5%, 0.1%, custom, etc.).

3. Pay attention to liquidity: Low liquidity markets can impact asset prices and are more likely to cause slippage.

4. Use limit orders: Although slower than market orders, limit orders guarantee the use of only specific or better prices, minimizing the negative impact of slippage.

Positive slippage and slippage tolerance

While slippage is generally understood as a less favorable outcome for traders, positive slippage can occur if the price moves in a direction favorable to the trader during order execution. Some exchanges allow users to set a slippage tolerance, which affects how much deviation from the expected price is acceptable. This option is popular on decentralized exchanges and DeFi platforms.

Balancing slippage tolerance is important, as setting it too low can delay order execution or cause trades to fail. Setting the slippage range too high risks encountering unexpected prices.

Summary

These concepts traders should learn the concepts of price difference and slippage to make wiser decisions and minimize potential risks. These concepts are all summarized by Trading Insight on the academy.binance page of Binance directly provided. Thank you readers for learning.
source : Access here
https://academy.binance.com/vi/glossary/slippage