What is Slippage in Trading?
Slippage refers to the difference between the expected price of a trade and the actual price at which the trade is executed. In the context of Decentralized Finance (DeFi), slippage is particularly important due to the market's inherent volatility and the way trades are executed on automated market makers (AMMs).
Types of Slippage
- Positive Slippage: This occurs when a trade is executed at a better price than anticipated, benefiting the trader.
- Negative Slippage: This happens when the trade is executed at a less favorable price, resulting in a higher cost for the trader.
Factors Influencing Slippage
Several factors can lead to slippage in DeFi trading:
- Market Volatility: Rapid price movements can cause significant fluctuations in execution price.
- Order Size: Large trades compared to liquidity levels can affect the price at which trades are filled.
- Transaction Speed: Delays in transaction confirmation can lead to changing market conditions before the trade is completed.
Managing Slippage
Traders can manage slippage by setting slippage tolerance limits in their trading settings, ensuring they have a clear expectation of the maximum acceptable deviation from the expected price. Using limit orders instead of market orders can also help mitigate slippage risks.