Why your trade costs more than expected: understanding price slippage

You clicked on “buy out” at the displayed price, but the execution happened at a different price. Welcome to the world of slippage. This phenomenon, common in trading, represents the gap between the price you expect and the final execution price of your order.

When and why this happens

Slippage occurs primarily when you use market orders (market orders). Two main factors are responsible for this: insufficient liquidity in the market and volatility. In a thinly traded market, your large order may be partially filled at different price levels. High volatility accelerates these changes and makes execution at the initial price virtually impossible.

Let's take a concrete example: you place a market order to buy out $100 worth of Bitcoin during a period of low liquidity. Your order is partially filled at $100, then the rest at $101 or $102. As a result: your average purchase price exceeds your initial expectations. This is slippage.

The quotation spread, the basis of slippage

To fully grasp slippage, one must first understand the (spread). This spread represents the difference between the maximum price a buyer is willing to pay (order) and the minimum price a seller is willing to accept (offer).

This spread varies significantly depending on the liquidity of the asset. Bitcoin, being highly liquid, typically shows a narrow spread. In contrast, less traded assets exhibit wider spreads, amplifying the risk of slippage.

Positive or negative slippage: a matter of timing

Although slippage is perceived negatively, it can sometimes work in your favor. If the market moves favorably during the execution of your order, you get a better price than expected. This is positive slippage.

However, traders prefer to control their exposure to risk. That's why most decentralized platforms (DEX) and DeFi protocols offer the ability to set a custom slippage tolerance. This parameter works as a safety net: your trade only goes through if the slippage stays within acceptable limits (0.1%, 0.5%, etc.).

Strategies to Master Your Execution

Fragment your orders: instead of placing a large order all at once, divide it into smaller chunks. This approach significantly reduces the impact on the order book and minimizes slippage.

Use Limit Orders: unlike market orders, Limit orders allow you to set a maximum price (buy out) or minimum price (sell). You only execute at the desired price or better. It's slower, but infinitely safer.

Monitor liquidity: before trading, check the depth of the order book. Low liquidity markets increase the risk of significant slippage.

Calibrate your slippage tolerance: too restrictive (0.01%), and your order will never go through. Too high, and you expose yourself to unreasonable prices. The right balance depends on your strategy and the current volatility.

To remember

Slippage is not a fatality; it is a reality of trading that one must adapt to. Understanding the mechanisms behind the pricing deviation, learning to manage your slippage tolerance, and using the right execution tools transform these hidden costs into managed risks. Particularly crucial in DeFi and on DEX where volatility reigns, this mastery becomes a real competitive advantage for any savvy trader.