Price Impact and Slippage are important concepts for traders to consider, especially when placing large buy or sell orders using a Market Order. Learn why we recommend that you use Limit Orders instead of Market Orders to prevent exposure to a high Price Impact.
What Is Price Impact?
Price Impact refers to the effect a trade has on the market price of an asset. Specifically, Price Impact measures the price change that occurs as a result of a trade, taking into account factors such as liquidity, order book depth, and order size. A high Price Impact means that a trade will likely significantly affect the asset's market price.
For example, if you are trying to buy $10,000 USD worth of a cryptocurrency at the current market price and decide to use a Market Order to place your large buy order, there may not be enough liquidity available to fill your market order.
In this hypothetical scenario, a portion of your order may fill at your expected price, but due to the Price Impact of your trade, you may end up with, say $9,850 of the cryptocurrency you wanted to buy.
What Is Slippage?
Slippage refers to the difference between the expected price of a trade and the actual price at which the trade is executed. High Slippage means that the actual execution price of a trade is significantly different from the expected price.
In other words, Slippage can be a consequence of price impact, especially when dealing with larger orders or in markets with low liquidity.
For example, if you are trying to buy $10,000 USD worth of a cryptocurrency at the current market price and decide to use a Market Order to place your large buy order, due to high volatility, the market price of the cryptocurrency may change rapidly, causing you to receive a different amount of crypto than what you expected.
How Can I Minimize My Exposure to a High Price Impact?
To help prevent exposure to Price Impact or Slippage, we recommend that you use Limit Orders instead of Market Orders.
A Limit Order is used to buy/sell crypto at a specific price. When you set a Limit Order, you choose the amount of crypto you want to buy/sell, and the price at which you want to buy/sell. Your order is only filled if the price reaches your desired target.
A Market Order is executed instantly at the current market price, which can expose you to a high Price Impact.
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