Bitcoin is one of the most popular cryptocurrencies around the world. However, this digital currency isn’t as stable as you might think. Slippage can result in a bit of a roller coaster ride. But what exactly is slippage, and why does it happen?
To help you understand the issue, we’ll explain what slippage is and how it can affect your cryptocurrency investment.
In this post, we’ll also cover how to avoid slippage and how to protect yourself from the issue. Finally, we’ll discuss what keeps cryptocurrencies stable and how to find an investment that won’t be affected by slippage.
Cryptocurrency: Day Trading Terminology
Cryptocurrency is a type of digital currency that uses cryptography as a form of securities. The currency can be transferred from one person to another worldwide at extremely low processing charges. Cryptocurrency can also be transferred among people through public ledgers.
Cryptography is a system where encrypted information so that the delivery of the currency is safe and secure. The system also prevents unauthorized users. The first cryptocurrency to be created was Bitcoin, which Satoshi Nakamoto founded. There are other types of cryptocurrencies as well:
- Ethereum
- Litecoin
- Ripple
- Monero
- Altcoin
Slippage in Crypto – Definition
Slippage is the difference between the expected prices of a trade and the price at which the trade was executed. Slippage is unpredictable so that it can take place at any time; however, it usually takes place during periods of high volatility.
Slippage can also occur when a large order is placed; there isn’t sufficient volume available at the chosen price to maintain the ask spread. Slippage can also occur in venues of the market such as currencies, bonds, equities, and futures.
How does Slippage Work?
Slippage does not have a negative or a positive movement because the difference between the actual execution price and the intended execution price is considered a slippage. When an order takes place, the security is bought or sold at a favorable price, usually offered by a market maker.
The result is usually favorable, less favorable, or equal to the intended execution price. The final and intended execution price is considered a positive slippage, negative slippage, or no slippage. Market prices also fluctuate, allowing slippage to occur during the delay when the trade is being ordered and executed.
However, the circumstances for slippage are not consistent and are constantly changing. Therefore, although a limited order might prevent negative slippage, it does carry a risk of the trade not being executed if the price doesn’t return to the limit level.
The risk is even greater when the market has massive price fluctuations, decreasing the time for a trade to be executed at the intended price.
Forex Day Trading
Forex day trading is a trading strategy for the short-term, and its main purpose is to buy and sell currency pairings on the same trading day. Usually, Forex traders place numerous trades a day, and by the end of the day, close them out and rarely hold positions overnight.
The price of currency pairings fluctuates, and this provides opportunities for day traders, as they are constantly looking for volatile pairings and have high liquidity. Forex day trading can generate results abruptly and is a quick way of seeing returns on investment.
The day trading is for those traders that have time to analyze trading information throughout the day. However, day trading also requires reactions to short-term changes and fluctuations in the prices of currency pairings. Therefore, traders will need to be disciplined and knowledgeable.
Strategies for Day Trading
Traders must be aware of the crucial day trading strategies, and they involve technical and fundamental analysis. For example, the information will help traders determine when to sell or buy currency pairings. Sometimes, traders will need different strategies, as the conditions of the market can change instantly.
Options Trading: Day Trading Terminology
Options are different from stocks, as they come with an expiration date, which is time-sensitive. Therefore, the expiration time plays a huge role in deciding the price of the option.
When you are selling or buying options, you have to specify the strike price. The strike price becomes the share price if you plan to exercise the options. Options are products that can also be used as leverage, and you can buy an option contract as well, and one options contract represents 100 shares.
This is why options are good for scalping for swing traders, day traders, and portfolio managers that are constantly looking to hedge positions without putting too much capital on the line. However, selling naked options is riskier than purchasing them, so brokers have high equity requirements.
Call Options
Call options allow the buyer to have the right to buy an underlying asset at a certain strike price and within a specific time. The seller must deliver a long position in underlying contracts in the future if the buyer decides to exercise the call option. If the call option expires, the seller will be forced to take a short position in the market.
A popular strategy usually implemented by traders is the ‘Covered Call,’ which allows traders to sell 100 shares of a company and obtain a premium on them. However, this strategy is risky because your shares will be called away if the share prices expire over the strike price.
Put Options
Put options allow the buyer the right to sell underlying assets at a certain strike price within a specific time. If the buyer chooses to exercise the option, the seller must deliver a short position from the strike price instead of outright buying, put options in hopes that the underlying price will drop.
Some traders will implement a ‘Cash-Secured Put’ strategy, which will allow them to sell shares against your account and force you (client) to buy the assigned shares.
Conclusion
In this article, we have discussed in detail what cryptocurrency is and how does it work. We have also shared information regarding slippage, its characteristics, and how it impacts the market.
Traders need to understand that slippage is present in all market venues, and it is tough to categorize its movement as negative or positive. We have also mentioned information about options, how traders use them, and how to leverage them. The two varieties of options: Call and Put, have also been discussed in this article.
Lastly, we discussed Forex day trading, its characteristics, and the types of traders that use it. There are several strategies that traders will be employ when they are day trading, and they have also been discussed.
While the information we have provided is helpful, the risk is one thing we cannot dismiss and is always present. Therefore, the best thing to do is thoroughly read all the tactics and strategies and pick those that suit your requirements.