Analysis of trading slippage and price impact to optimize your trading strategy
📈📆Before using Swap for trading, it is crucial to accumulate some key concepts and understand industry terminology. These concepts not only help you better understand trading mechanisms, but also help you make wiser decisions in the highly dynamic and risky cryptocurrency market. This article will guide you to gain a deeper understanding of two key concepts: price impact and trading slippage, so that you can have more confidence and skills in trading.
What is Price Impact?
📊Price impact refers to the impact of individual trading behavior on the market price of related assets, which is directly related to the liquidity depth of the liquidity pool. When the number of orders placed by users exceeds the liquidity depth, the price impact will significantly increase, which may cause traders to purchase assets at prices far higher than the market price, thus taking on higher risks.
Following is an extreme example that explains the impact of CandySwap liquidity exchange on prices:
Suppose I want to sell 1,000,000 MEERs on CandySwap, with a total value of 106,000 USDT. However, due to the current market price, there is not enough depth in the liquidity pool to handle such a large-scale order, so I can only exchange up to 70,068 USDT. This situation has led to severe price fluctuations in the short term, forcing me to sell all my MEERs at a relatively low price. Therefore, large transactions may cause significant fluctuations in the case of limited liquidity.
In the trading market, the influence of price on traders is diversified. When the price of an asset is relatively low, traders have the opportunity to buy the asset at a lower price and subsequently sell it for a profit when the price rises. This situation, known as an arbitrage opportunity, illustrates that price can be either a positive or negative factor for traders, depending on the relative value of the assets.
How to minimize negative price impact
🏇In order to ensure that the negative impact of your trade on the price is minimized, it is recommended that you reduce the amount of a single trade and do it in batches, which can effectively reduce the impact on the market price. You can also choose to wait for more liquidity to come in before trading to reduce the impact on the price. Before engaging in any token trading, it is important to fully understand the relevant project and risk assessment to avoid potential losses when investing or providing liquidity due to lack of understanding.
In addition, it is strongly recommended to confirm the accuracy of the token contract before purchasing tokens to avoid possible risks. Certain bad projects may create tokens that are similar to mainstream assets and provide liquidity for that token. This can lead to misdirection, so users need to be careful when trading assets to avoid fraud or buying the wrong asset.
Since the native assets in the public chain network (such as ETH in the Ethereum network and MEER in the Qimeer network) do not have token contracts. Therefore, when conducting exchange transactions, it is necessary to use the encapsulated token to conduct the transaction. On the CandySwap platform, if you want to exchange MEER, you need to use the MEER encapsulated WMEER token to trade. Get the correct WMEER tokens contract address. You can query through the blockchain explorer, WMEER tokens contract address: 0x470cBFB236860eb5257bBF78715FB5bd77119C2F
What is slippage？
📝Slippage is a common trading phenomenon that often occurs when the actual transaction price is inconsistent with the expected price. This is usually due to other traders trading during the process of placing or about to complete orders, resulting in price changes.
Slippage can be divided into two types: positive slippage and negative slippage. To better understand, let’s use MEER’s transaction on CandySwap as an example.
When you place an order to buy MEER, if the final transaction price is higher than the price you selected when placing the order, you will face negative slippage. This means that the transaction fee exceeds your expectations, and you need to pay a higher price to buy MEER. On the other hand, if the buy price is lower than the price you placed the order at, there is a positive slippage. Positive slippage occurs when selling orders, which means that you sold MEER at a lower price.
The occurrence of slippage is usually affected by market fluctuations and liquidity conditions. Slippage may be more obvious during busy trading or large market fluctuations. To reduce the risk of slippage, it is recommended that you choose the appropriate price and quantity when placing an order. At the same time, understanding market liquidity and price fluctuations can help better cope with slippage risks.
The impact of slippage limits on trading
🪺There is often a “sweet spot” for setting the slippage tolerance. This ideal amount varies based on each individual token, transaction, and your personal risk tolerance. Swap trading cannot completely avoid slippage, but it can reduce the risk of slippage and minimize losses.
Too High:
When slippage limits are set very high, trades can still be completed even if prices fluctuate significantly, but this setup could leave the door open to attacks by clip robots. The robot looks for slippage profits by detecting all trading pairs, once the robot detects a large purchase order from a large user, it will package the transaction into the block in advance by increasing the gas fee for front-running buying, when the real user buys, the price will be increased, the robots will be shipped one after another to achieve profitability!
Too Low:
When you need to conduct large amounts of transactions and set the slippage limit too low and far below the price impact, this setting of the transaction is likely to cause transaction failure (rollback). Although setting a low slippage limit can prevent clip robot attacks, it may also cause transaction failure and loss of gas fees.
Therefore, when setting slippage limits, it is necessary to consider trade-offs to ensure that you can prevent robot attacks and ensure the smooth progress of the transaction.
How to set slippage to reduce losses
🐬CandySwap provides a tool called the slippage tolerance feature, and allows users to set a desired percentage of tolerable slippage for their trade. This feature can be accessed within the swap settings.
CandySwap’s trading slippage setting is set to 0.5% by default. You can adjust the slippage limit accordingly according to the liquidity of the token pair. To avoid price impact, it is recommended that you set a slippage limit close to the price impact. When CandySwap processes and confirms a transaction, if the price change of the exchange token exceeds the slippage limit you set, the transaction will fail. Although failed transactions will incur gas fees that can not be refunded, this will effectively prevent losses in capital caused by purchases exceeding market value due to slippage.
What is the difference between Price Impact and Price Slippage?
🪺🐳Price impact and price slippage are similar in definition, but there are also minor differences.
Price impact refers to the actual price changes directly caused by your own trading behavior. When you execute a trade, your buy or sell orders may have an impact on the market price, causing it to rise or fall.
Price slippage refers to the change in price caused by external broad market movements (unrelated to your trade). Slippage may be lower or higher than the price impact, but in a short period of time, if no other traders participate, slippage will be equal to the price impact. Slippage is an unknown state that depends on the activities of other traders when you trade.
Like price impact, the degree of trading slippage is affected by the liquidity pool. By setting slippage reasonably, you can profit from market fluctuations, but you also need to be aware that slippage losses may occur when liquidity is low.
