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Order types and slippage on thin alts

Lesson 10 · about 9 min

Every order type is a different answer to the question "what do you want to happen if the market is not where you expected?" On a thick BTC book the answers barely matter. On a thin alt they decide whether you keep the trade's profit or hand it to the book.

The core order types

Market. Fill now at whatever is available. Guarantees execution, not price.

Limit. Fill at this price or better, or not at all. Guarantees price, not execution.

Stop-market (often just "stop" or "stop-loss"). When the price touches the trigger, send a market order. Guarantees the exit happens; the fill can be far from the trigger in a fast market.

Stop-limit. When the price touches the trigger, send a limit order at a second price. Protects against a terrible fill; in a gap or a crash the limit may never fill and you stay in the losing trade. Beginners get hurt by this one more than any other.

Take-profit variants are the same two mechanisms pointed at a target instead of a loss.

Post-only. A limit order that is cancelled if it would execute immediately, guaranteeing you the maker fee.

Reduce-only (mainly on perps). An order that can only reduce a position, never open or flip one. Use it on every stop and target so a stale order cannot open a new trade by accident.

OCO ("one cancels the other"). A stop and a take-profit placed together; when one fills the other is cancelled. Where offered, it is the cleanest way to bracket a spot position.

Which to use for what

Situation Order Why
Entering a liquid pair, can wait Limit (post-only) Maker fee, controlled price
Entering on a breakout Market or stop-market Getting in matters more than a few basis points
Protective stop on a liquid pair Stop-market Must exit; the book will absorb it
Protective stop on a thin alt Stop-market, smaller size A stop-limit may never fill; size for the slippage
Target on any pair Limit You are the maker; there is no urgency

Slippage: what it is

Slippage is the difference between the price you expected and the price you got. On a market order it comes from walking through the book: your first units fill at the best ask, the next at the next level, and so on. Your average price is worse than the top of book by an amount that depends on your size relative to the depth.

Worked example on a thin alt. The asks are:

Price Quantity Value
$2.000 1,000 $2,000
$2.010 1,500 $3,015
$2.030 2,000 $4,060
$2.080 5,000 $10,400

You send a $10,000 market buy.

  1. $2,000 fills at $2.000 (1,000 units).
  2. $3,015 fills at $2.010 (1,500 units). Running total $5,015.
  3. $4,060 fills at $2.030 (2,000 units). Running total $9,075.
  4. The remaining $925 fills at $2.080 (about 445 units).

Total units: 4,945. Average price: $10,000 ÷ 4,945 = $2.022. Slippage versus the top of book: (2.022 − 2.000) ÷ 2.000 = 1.1%. You are down 1.1% the instant you enter, before the spread and fees, and the book on the way out looks the same in the other direction. A round trip in this coin costs roughly 2.5% before it can begin to work.

Key idea: Slippage is a function of your size relative to the book, not of the order type. A stop-limit does not remove it; it just converts "a bad fill" into "no fill", which in a crash is worse.

The stop-limit trap

A trader sets a stop-limit on an alt: trigger $2.00, limit $1.98. The coin gaps on bad news from $2.05 to $1.85 in a single minute. The trigger fires, a limit order at $1.98 is placed, and the best bid is $1.85. The order sits unfilled while the price keeps falling. The trader wakes up at $1.40 still holding the position with a "stop" that never worked.

If you use stop-limits, set the limit far enough below the trigger to fill in any plausible move (5% or more on alts), or accept that on a thin coin the only stop that reliably works is a stop-market sized small enough that the slippage is tolerable.

Sizing for slippage

Add expected slippage to your stop distance when sizing. If your plan stops 4% below entry and you expect 1% of slippage on the stop plus 1% on entry, the real risk is 6%, and your size should be two thirds of what a 4% stop implies. The next lesson works through the arithmetic.

Try it: On your exchange, open the order book of an alt ranked around 150th by market cap. Using the visible asks, calculate the average fill price for a $5,000 market buy the way the worked example does. Then do the same for a $500 buy. The difference is the cost of size on that coin.

Recap

  • Market guarantees execution, limit guarantees price, stops turn into one or the other when triggered.
  • Use reduce-only on stops and targets, post-only when you want the maker fee, and OCO to bracket.
  • Slippage comes from walking the book; compute it by filling level by level and averaging.
  • Stop-limits can fail to fill in a gap and leave you in the trade; on thin alts prefer a smaller stop-market.
  • Add expected entry and exit slippage to the stop distance before you size.

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Slippage on a market orderA buy order clears four price levels, so the average price paid is worse than the price first quoted.Buy 1,000 shares at marketpricesell orders resting (bar length = size)20.04300 shares20.03200 shares20.01200 shares20.00300 sharesnothing resting at 20.02order sweeps up the bookaverage fill 20.02SLIPPAGE0.02 a share$20.00 in totalintended 20.00Each level fills at its own price; the average is what you really paid.
Slippage on a market order. You click at 20.00, but only 300 shares are resting there, so the rest of the order fills at 20.01, 20.03 and 20.04. The average price paid is 20.02, and that two-cent gap is slippage.
Market, limit and stop ordersA price track crossing a resting limit order below the market and a stop order above it.10410210098PriceTime (the market moves left to right)priceSTOP BUY at 103.00waits above the market; becomes a market order when touchedtriggers hereMARKET ORDERfills at once at 100.60filled hereLIMIT BUY at 98.50rests below; fills only at 98.50 or better
Market, limit and stop orders. A market order buys straight away at whatever price is there. A limit order waits below until the price comes to it, and a stop order sits above and turns into a market order the moment price touches it.
How a position size is worked outAccount size, risk per trade and stop distance feed into one box giving the number of shares.ACCOUNT SIZE$25,000your capitalRISK PER TRADE1%of the accountSTOP DISTANCE$0.50entry to stopPOSITION SIZE500 sharesrisk budget: $25,000 × 1% = $250position size: $250 ÷ $0.50 = 500 shares
Working out a position size. Three numbers decide how big a trade is: the account, the share of it put at risk, and the distance from entry to stop. One percent of $25,000 is a $250 budget, and a $0.50 stop divides into that 500 times.