Shield Academy | Slippage and How to Customize Slippage on DEX

Slippage is part of the risk of investing, given the volatility of cryptocurrency and the high demand for blockchain assets. Knowing what slippage is in cryptocurrency and understanding the controls available to you to avoid it is the first step toward investing smarter. To minimize the effects of slippage on your investment prospects, keep an eye on volume, set your thresholds, and trade outside of volatile periods.

What is slippage?

When cryptocurrency traders place a buy or sell order on an exchange, they typically expect the order to be filled at their specified price. Unfortunately, this is not always the case due to a costly issue known as slippage.

Slippage occurs when traders are forced to settle for a different price than what they originally requested due to a price movement between the time the order (say, for Bitcoin) enters the market and the execution of a trade. This can happen in any market, including forex and stocks. Due to the high levels of price volatility, it is more common and much worse in crypto markets (especially on DEX like PancakeSwap and Uniswap).

Types of slippages

There are two kinds of slippages: positive and negative. Suppose the actual executed price for a buy order is lower than the expected price. In that case, it is considered positive slippage because it provides traders with a better rate than they intended. Suppose the actual executed price for a buy order is higher than the expected price. In that case, it is considered negative slippage because it gives traders a less favorable rate than they originally attempted to execute. In the case of sell orders, the opposite is true.

How to set slippage on Uniswap

Step 1

To access the Uniswap transaction settings, click the gear icon in the upper right-hand corner of the Uniswap page.

Step 2

Use the default settings or enter the desired Slippage Tolerance value. It’s recommended that you manually set the Slippage Tolerance value around 0.5%. If you want to increase the Slippage Tolerance, enter a percentage that is not one of the three preset options.

Step 3

Once you’ve determined your Slippage Tolerance and the number of tokens you want to acquire, the final step is to click “Confirm Swap.”

How to set slippage on PancakeSwap

Step 1

To change your slippage tolerance, go to the Pancakeswap browser’s top right-hand corner and click the Settings icon.

Step 2

Use the default settings or enter the desired Slippage Tolerance value. It’s recommended that you manually set the Slippage Tolerance value around 0.5%. If you want to increase the Slippage Tolerance, enter a percentage that is not one of the three preset options.

Step 3

Once you’ve determined your Slippage Tolerance and the number of tokens you want to acquire, the final step is to click “Confirm Swap.”

Why is slippage common in crypto?

Slippage occurs in all markets, but it is especially common in cryptocurrency markets. This is due to the extreme volatility that cryptocurrencies are subjected to. With tens of thousands of transactions per hour, the price of cryptocurrencies fluctuates almost constantly. This means that the bid-ask spread has most likely changed when an investor submits an order and a broker fills it. In fact, it could change several times in that short period of time.

Demand is not the only factor that influences trading rates and slippage. Crypto is frequently in the news, including Bitcoin, which has swayed over the majority of crypto markets. When there is breaking news about cryptocurrency, such as Elon Musk’s announcement that Tesla no longer accepts Bitcoin, prices increase. This is because, unlike fiat currency, coins lack a reference price. They are only worth what someone is willing to pay for them and what someone else is willing to sell them for. As a result, the bid-ask spread is constantly changing.

How to control slippage when trading crypto?

Slippage may be a frustrating aspect of cryptocurrency investing for many new investors, but there are controls in place to reduce its impact. You simply need to understand how to set your slippage tolerance.

As part of their market order system, most cryptocurrency brokers include a slippage tolerance control. Investors can specify how much slippage (positive or negative) they are willing to accept, and the broker will only fill orders that fall within that tolerance. The order is not filled if the liquidity or price tolerance exceeds the threshold. To protect themselves from volatility on any given trading day, most traders set the tolerance to 0.10% or less.

Another way to reduce slippage is to avoid trading during volatile times. This is easier said than done when it comes to cryptocurrency! Slow trading days are few and far between, but there are times when volatility is less of an issue, such as early afternoon trading hours or “slow news days,” typically Tuesday and Wednesday. Nonetheless, when placing market orders during these times, it is best to set slippage tolerance.

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