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The Importance of Slippage in Stock Trading
Last Activity 3/5/2024 2:40 PM
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Frank Birch

Posts: 161

Joined: 3/25/2006
Location: UK

User Profile
Subject : The Importance of Slippage in Stock Trading
Posted : 2/25/2024 6:02 AM
Post #32409

Hi to all,

Over the past month, i have had a few emails concerning building strategies for trading USA based stocks end of day and what to look for in the actual set up of the profile for testing.

The one thing that stood out to me that not a lot of traders do not add any form of figure to the slippage side of the build in testing?
In Futures we allow $7.50 round trip ($2.50, slippage/ $2.50, Entry/ $2.50, Exit).
For Forex similar but a higher figure.

So i have written a document on my thoughts to consider when building and testing mechanical trading strategies for stocks, hope it helps.

Introduction to Slippage
In the realm of stock trading, several factors can influence the outcome of your trades, and one of the most critical yet often overlooked is slippage. Slippage occurs when there is a difference between the expected price of a trade and the price at which the trade is actually executed. This document aims to shed light on the concept of slippage, its potential impact on trading strategies, and how it interacts with other trading costs such as entry and exit commissions.

Slippage Explained
Slippage is not a fixed cost but varies based on market conditions, the liquidity of the stock, and the size and type of order placed. It can either work against you, resulting in a higher purchase price or a lower sale price than expected, or in your favor, offering a better execution price than anticipated.

Factors Influencing Slippage
Stock Liquidity: Stocks that are traded in high volumes typically experience lower slippage due to the availability of more buyers and sellers. In contrast, less liquid stocks may have a higher bid-ask spread, leading to greater slippage.

Market Volatility: High market volatility can lead to rapid price changes, increasing the likelihood of slippage.

Order Size: Larger orders may not be filled at a single price point if they exceed the available volume at the best bid or ask, leading to higher slippage.

Type of Order: Market orders are most susceptible to slippage, as they are filled at the best available price, which may not be the expected price. Limit orders can mitigate slippage by specifying the maximum or minimum price at which you are willing to buy or sell.

The Cost of Slippage
For highly liquid stocks in stable market conditions, slippage might be minimal, ranging from $0.01 to $0.10 per share. However, in more volatile markets or for less liquid stocks, slippage can significantly increase, ranging from $0.10 to several dollars per share. Using a conservative estimate of $0.25 per share for slippage can cover most scenarios under normal conditions, yet traders should be prepared for higher slippage in less favorable conditions.

Entry and Exit Commissions
In addition to slippage, traders must consider the impact of entry and exit commissions on their trading costs. While many U.S. brokerages have moved to a zero-commission model for standard online trades, certain transactions may still incur fees ranging from $5 to $10 per trade. These fees, combined with slippage, can substantially affect the profitability of trades.

Managing Slippage and Trading Costs
Understanding and managing slippage is crucial for minimizing trading costs and maximizing profitability. Traders can employ several strategies to mitigate slippage, including:

Trading during peak liquidity times to benefit from lower bid-ask spreads.
Using limit orders to control the maximum price paid or the minimum price received for a stock.
Being mindful of market news and events that can increase volatility and, consequently, slippage.
Adding a conservative figure (0.25) in Test settings, profit calculation.

Slippage is an integral aspect of stock trading that can significantly impact trade outcomes. By comprehensively understanding slippage and its contributing factors, traders can better manage their trading strategies and costs. Coupled with an awareness of entry and exit commissions and the judicious use of leverage, traders can navigate the complexities of the stock market more effectively, aiming for optimal trade execution and profitability.


Frank Birch

[Edited by Frank Birch on 2/25/2024 6:03 AM]

Attached file : Slippage.png (110KB - 78 downloads)

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Frank Birch

Posts: 161

Joined: 3/25/2006
Location: UK

User Profile
Subject : RE: The Importance of Slippage in Stock Trading
Posted : 2/26/2024 12:28 PM
Post #32410 - In reply to #32409

Hi to all,

I have been asked to look into this deeper to share with all.
there are 2 options in the test settings, profit calculation tab for adding the slippage.
The first is a fixed dollar amount $0.25.
The second is a percent value 0.25%.

The problem you will face is say trading a big list, the higher cap stocks to lower cap.
Assigning an average percentage value for slippage costs in stock trading can be somewhat complex due to the variability in market conditions, stock liquidity, and trading volume. However, for the sake of estimation and budgeting, traders often use a small percentage of the trade value to account for slippage in their cost calculations.

A common approach is to use a range that can adjust based on the expected volatility and liquidity of the stock. For example:

For highly liquid stocks in stable market conditions, slippage might be relatively minimal, possibly in the range of 0.01% to 0.05% of the trade value.
For less liquid stocks or in more volatile conditions, slippage could be significantly higher, potentially ranging from 0.1% to 0.5% or more of the trade value.
It's important to consider that these are rough estimates. The actual slippage experienced can vary widely depending on specific market conditions at the time of the trade, the size of the order, and how aggressively the trade is executed (e.g., immediate execution with market orders vs. using limit orders to cap the maximum acceptable slippage).

For budgeting or planning purposes, using a conservative estimate tailored to the specific characteristics of the stock and market conditions can help in setting realistic expectations for the costs associated with slippage.
So for this experiment I have set the percent value to 0.25%

Now our first performance report with zero slippage, as you can see all well and good.

The 2nd is with 0.25 cents added (fixed rate) not so good.

The 3rd using a percent value set at 0.25% (conservative).

As you can see by all 3 performance reports they differ considerably and ive only touched on this.
If you are thinking of building a trading mechanical Strategy please consider adding slippage into the equation to achieve a real time trading environment, cost of doing business I am afraid.


Frank Birch

[Edited by Frank Birch on 2/26/2024 12:37 PM]

Attached file : Performance report no slippage.png (310KB - 52 downloads)
Attached file : Slippage set to 0.25 cents.png (308KB - 49 downloads)
Attached file : Slippage set to 0.25 %.png (309KB - 48 downloads)

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