Why do your trades cost more than you expected? Everything about slippage

If you have ever executed a market order and the final price was different from what you saw on the screen, you have already experienced slippage. This phenomenon is more common than you think, especially in volatile markets or those with low liquidity. Understanding what it really is and how to minimize it can save you money on every trade.

Slippage explained in simple terms

Slippage occurs when the final average price of your trade differs from the price you initially expected. Imagine you want to buy Bitcoin at 40,000 USD, but when you execute the order, you end up paying 40,150 USD on average. That difference is slippage.

Why does it happen? The main reasons are two: lack of liquidity in the market and price volatility. When you use Market orders ( immediate buy/sell ), your order is executed at the price available at that moment. If there are not enough limit orders at your target price, your transaction is completed at less favorable prices.

The bid-ask spread: the silent culprit

To fully understand slippage, you need to know the bid-ask spread. This is the gap between the highest price that buyers are willing to pay (bid) and the lowest price that sellers accept (ask).

A Bitcoin with a high trading volume has a small spread because there are thousands of active orders. In contrast, in a market with low liquidity, that spread can be considerably wider, amplifying slippage. Market liquidity is crucial: more trading volume means less price difference and fewer unpleasant surprises.

When slippage plays in your favor

Not everything is negative. There is something called positive slippage, which occurs when prices move in your favor during execution. If you place a buy order and the price drops before it is completed, you will pay less. Although it is less common, keep an eye out for these opportunities.

Practical strategies to reduce slippage

Divide your large orders

Instead of executing a massive order of $1,000 at once, split it into 5 orders of $200. This decreases the market impact and significantly reduces negative slippage.

Use limit orders instead of market orders

Limit orders allow you to set the exact price at which you want to buy or sell. While they take longer to execute, they ensure that you will never pay ( or receive ) less than what you set. It's like putting a ceiling on your slippage losses.

Set sliding tolerances

Many DeFi platforms and decentralized exchanges allow you to set a tolerance level, for example, 0.5% or 0.1%. If the slippage exceeds this percentage, the transaction is automatically rejected. But be careful: if you set it too low, your orders simply won’t be executed.

( Choose the right time and market

Avoid trading illiquid assets or during low market activity hours. Bitcoin and Ethereum have tight spreads because the volume is massive. Smaller or emerging tokens typically have wider spreads and a higher risk of slippage.

The conclusion that every trader needs to know

Slippage is inevitable in certain contexts, but it is not something you should accept passively. Understanding the bid-ask spread, knowing the liquidity of your assets, and applying the right strategies will allow you to significantly reduce your operational costs. Especially if you are trading in decentralized finance, where slippage can be more noticeable, this knowledge is essential to protect your capital and enhance your profitability.