What is Price Impact?

When trading on Matcha, you may notice that there is a small number below the price of the token you are trying to buy when attempting to make a trade.

That number is Price Impact and this article will go into detail as to what that is, what it is not, and how Matcha helps you make better informed trading decisions.

When trading on Matcha, it's important to understand the concept of price impact. Price Impact refers to the influence that a user's trade has over the market price of an underlying trading pair. In other words, when you buy or sell a token, your trade can affect the price of that asset.

Price impact is directly related to the amount of liquidity in the pool. If there is a lot of liquidity in the pool, then a single trade will have less of an impact on the price. However, if there is little liquidity in the pool, then a single trade can have a significant impact on the price.

Price impact can be particularly high for illiquid trading pairs. For example, if you're trading a small-cap token that doesn't have a lot of trading volume, then your trade can have a big impact on the price. This can cause significant losses for traders who aren't aware of the price impact.

It's important to understand that price impact is different from price slippage. Price slippage refers to the difference between the price that was quoted to you when making your order, and the executed price. This difference is caused by external market movements unrelated to your trade. Price impact, on the other hand, is caused by your trade itself.

To learn more about Slippage, check out our article here.

To mitigate price impact when trading, it's important to be aware of the liquidity of the trading pair you're trading. If the trading pair is illiquid, then you may want to consider splitting your trade into smaller orders to reduce the impact on the price. Additionally, you can use limit orders to specify the price at which you want to buy or sell, which can help reduce the impact on the price.

Price impact is the influence that a user's trade has over the market price of an underlying trading pair. It's important to be aware of price impact when trading, especially for illiquid trading pairs. To mitigate price impact, consider splitting your trade into smaller orders or using limit orders and make sure you review the price impact before proceeding with your trade.