How Can One Measure the Potential Slippage of a Trade before Executing It?

Potential slippage is primarily estimated by analyzing the depth of the order book, particularly the size of the bid and ask queues near the desired execution price. A thin order book suggests higher potential slippage, especially for large orders, as there are fewer counter-orders available at the best price.

Traders can use limit orders to control maximum slippage or utilize a Volume-Weighted Average Price (VWAP) strategy for large trades. High volatility also increases the likelihood of slippage, so checking market conditions is crucial.

Comparing the trade size to the available liquidity at various price levels provides a quantitative estimate.