Slippage, volume, and liquidity. You’ve probably heard these terms used before. And if you’re like many traders, you may have assumed the theory behind them is difficult or complicated.
This isn’t the case. In this 2-part article series, we’ll show you that the three concepts can be explained in just minutes — which is important, because understanding slippage, volume and liquidity is key to successful trading.
We’ll start with slippage.
In trading, when we talk about price — say the price of a bitcoin — we’re really talking about the last price at which someone bought or sold an asset. If Bitcoin is currently at $4000, it really means the last trade which took place was at that price.
This means that a lot of the time, you can’t fill a market order at what appears to be the “market price”. For example, if the last bitcoin on Adara’s exchange was bought for $4,000, but the current asks are at $3,800, a market order will be filled at the latter price.
This process is known as “slippage”, wherein market orders get filled at inferior prices. This also applies to stop market orders and other market order variations.
To understand slippage well, you need to understand how markets work. Markets are a function of supply and demand. When demand rises, there are more participants who want to buy at a higher price. When demand falls, there is increased supply and the reverse happens.
Now, while this is happening, you can take one of two positions by choosing to be a price taker or price maker.
Makers vs Takers
When we talk about price, say the price of bitcoin, we’re really talking about the last price at which someone bought or sold bitcoin. If Bitcoin is at $4000, it really means the last trade which took place was at that price.
In every trade, there are two parties: the person who sets the price they want to buy or sell at and the person who chooses to buy or sell at that price. So it may be the case that the last trade was someone selling Bitcoin for $4000 and someone agreed to buy at that price. Or maybe someone wanted to buy bitcoin for $4000 and someone else agreed to sell at the price.
Either way, one person made the price offer and the other took that offer. This is how all trades happen. The maker creates an offer. The taker, on the other hand, chooses to take the maker’s offer. Every trade is like this on a basic level.
Makers and Takers are the Yin and Yang of trading, while the end price is the middle way.
Trading without slippage
Trading without slippage means doing one of two things.
First, you can look for times when the current bid or ask matches the indicated market price. This way, you won’t risk slippage when making your trades.
Second, you can simply avoid market orders and use limit ones instead. You may see orders go unfilled this way — but you’ll be certain to avoid slippage.
In the next part of this 2-part series, we’ll cover 2 more concepts related to makers, takers, and price action: volume and liquidity. Stay tuned!
Would you like to learn more about crypto trading? Сheck out our educational platform Adara Academy