Slippage tolerance, in the context of crypto trading, refers to the maximum acceptable deviation between the expected price and the executed price that a trader is willing to tolerate for their trades. It is a predefined limit set by the trader to manage the impact of slippage on their trading outcomes.
When placing trades, traders often have a specific target price in mind, especially when using market orders. However, due to factors like low liquidity or high volatility, the executed price may differ from the intended price. Setting a slippage tolerance allows traders to control the acceptable range of deviation from their target price.
For example, if a trader sets a slippage tolerance of 1% on a buy order for a specific cryptocurrency, they are willing to accept a deviation of up to 1% from their intended purchase price. If the executed price falls within this 1% range, the trade will be considered acceptable. However, if the slippage exceeds the predetermined tolerance, the trader may choose to cancel the trade or reassess their strategy.
Setting a slippage tolerance helps traders manage their risk and avoid significant unexpected losses or unfavorable trade outcomes. By considering market conditions and adjusting the slippage tolerance accordingly, traders can make more informed decisions and adapt to varying levels of liquidity and volatility in the crypto market.