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Price impact Meaning

Price impact is the change in an asset's price that occurs as a direct result of a specific trade. When you place a buy order, you are absorbing the available sell liquidity; if your order is large enough, you will clear out the cheapest sell orders and move on to more expensive ones, effectively raising the price. Price impact is a crucial consideration for large traders and whales, as a high price impact means they end up paying more than the initial market price.In the context of AMMs (Automated Market Makers) like Uniswap, price impact is mathematically predictable.

Because the pool has a finite amount of liquidity, a large trade relative to the pool size will shift the ratio of assets significantly. Most DEX interfaces show the Estimated Price Impact before you confirm a trade. If the impact is too high (e.g., over 2%), it is usually better to break the trade into smaller chunks or use an aggregator to find more liquidity across multiple pools.Price impact is often confused with Slippage, but they are technically different.

Slippage is the change in price that happens between the time you submit a trade and the time it is actually executed on the blockchain (often due to someone else's trade getting in first). Price impact is the change in price that your own trade causes.

Both factors combined determine the final effective price you pay for an asset.To minimize price impact, institutional traders use TWAP (Time-Weighted Average Price) or VWAP (Volume-Weighted Average Price) strategies. These involve automated bots that execute small portions of a large order over a set period of time.

This allows the market to absorb the liquidity without a single massive spike. Understanding price impact is essential for anyone trading significant amounts of capital, as failing to account for it can lead to hidden costs that significantly erode profit margins.

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