What is Slippage?
Slippage is the difference between the expected price you wish to pay for a coin and the actual price.
Say you wish to buy $SOLX at $0.9. Then you head over to an exchange to place your order.
But after finalizing your order, you realize that you bought it at a higher price of $1.
So slippage occurs when you buy or sell an asset at a higher or lower price than intended.
Slippage occurs in all markets like stocks and forex, but it is more prevalent and worse in crypto (especially on DEXs) for two reasons:
Volatility: Cryptocurrency has high price volatility compared to other traditional marketplaces. It's common for the price of a crypto asset to increase or decrease by up to 50% rapidly. This causes an insane amount of slippage in the market.
Low liquidity: Liquidity means how quickly you can trade an asset without impacting the price. Coins with low liquidity and trading activity have higher slippage.
Types of slippage.
Slippage can either be negative or positive.
Positive slippage
If you buy a coin lower than you expected, it is a positive slippage.
The opposite is the case for a sell order.
Negative slippage
If you buy a coin higher than you expected, it is considered negative.
The opposite is also true for sell orders.
How to calculate slippage
There are two ways to express slippage, either as a percentage or in a dollar amount.
You calculate the dollar amount by subtracting your expected price from your actual price.
To calculate the slippage percentage, you divide the dollar amount of the slippage by the difference between the expected price and the worst possible execution price.
Then you multiply by 100.
The worst possible execution price is the limit price you set when placing the order (assuming you're placing a limit order and not a market order)
So, Slippage percentage = (dollar amount / (LP - EP)) x 100
EP = expected price
LP = limit price/ worst expected price
Let's say you expect to buy 1 $SOL at $200. But you're not willing to pay more than $210.
So you enter a limit order when the price of SOL is $200 with a limit price of $210. Then your trade doesn't execute until the price rises to $205.
To calculate the slippage in terms of dollar amount, you subtract your expected price ($200) from your actual price (205). That means your slippage is $5.
To get the slippage percentage, you divide 5 by 10. That is the difference between the price you expected to get and the worst possible execution price.)
The result is 0.5, which becomes 50% when multiplied by 100.
That is (5/(210-200)) x 100 = 50%
How to minimize slippage
It is almost impossible to avoid slippage in crypto due to high volatility and liquidity issues, but you can minimize it using these tips:
Avoid trading during very volatile market periods.
Place limit orders instead of market orders. Market orders are executed immediately at the current price, meaning you have no control over the price you buy an asset. But a limit order doesn't settle for an unfavorable price since you decide the price you wish to trade an asset. But, limit orders are not guaranteed as the price may not get within the set price boundaries.
Set your slippage tolerance low. Setting your slippage tolerance low lets you avoid losing lots of money due to slippage. But if you put it too low, your trade may never execute.
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