Understanding Price Impact
5 important things to know about Price Impact
- 1.📉 Price impact refers to an asset's market price change due to a trade. It's the difference between the current price and the estimated price after the trade, expressed as a percentage.
- 2.📊 Higher price impact means a trade will significantly affect the market price, leading to slippage, the gap between the expected and actual trade execution price. This is more common when trading large amounts or low TVL pairs.
- 3.🛡️ A lower price impact indicates minimal influence on the market price, resulting in less slippage and a more predictable trading outcome.
- 4.🔍 When swapping on a DEX, consider the price impact to avoid unexpected losses or unfavorable trade outcomes. Consider splitting large trades into smaller ones to mitigate the effects of price impact.
- 5.💧 Higher liquidity on a DEX helps reduce price impact and slippage. As a trader, always check the liquidity of the trading pair you're interested in to ensure smoother and more predictable transactions.
Taking a proactive approach to understanding and managing price impact will help:
optimize trade execution
Always consider liquidity, use appropriate trading strategies, and monitor price impact diligently to thrive in the ever-evolving landscape of DeFi.
The future of trading lies in the hands of informed and strategic participants 🤝