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Slippage, The #1 Killer of System Traders |
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Once the decision to begin futures system trading has been made, one key factor in the quest for the right system and broker for you is “slippage”. Slippage can make or break account performance, often being the difference between a good year and a poor year.
Worldwide Futures Systems looks at slippage in two different regards. The first form is “System Slippage,” the second is “Best Possible Slippage”. Both are useful in their own way. First, let’s define the two.
System Slippage is simply the difference from the entry price generated by a trading system to the actual fill price. For instance, if a system gives a signal to “Buy 1 Gold at 600.00 stop” and your order is filled at 600.50, that is .50 slippage, or $50.
Best Possible Slippage is the difference between the best possible price your order could have actually and realistically been filled at to where it was actually filled. Continuing with our Gold example above, if the market happened to open at 600.50, that is also the best possible price the stop could have been filled at, and would result in zero Slippage to Best. However if the market opened at 600.20 and the order was then filled at 600.50, that is .30 or $30 in Slippage to Best.
Analyzing System Slippage
System Slippage is useful in determining whether a system is suitable to trade in a particular market. If we regularly see above average System Slippage, it indicates that a market may be too thin to trade or that that type of order (Market, Stop, etc.) may not be suited for that market. This system slippage must be considered in selecting a system.
Take a system which trades 100 round-turns (200 sides) in a year and claims a $20,000 profit. Imagine the developer tested it with an estimated system slippage of $20 per side or execution, a common, but conservative, industry estimate. Now imagine when the system actually trades, slippage is on average $40 per side, twice the developer estimate. This is not unusual. $20 extra slippage on 200 executions adds up to $4,000. That’s 20 percent less than advertised. Before we let our clients trade any system, we make sure a system is suited for the market(s) it trades. If we suspect excess slippage will occur in real-time, you will be made aware of that suspicion in your evaluation process.
Analyzing Best Possible Slippage
Once the evaluation of System Slippage is done, we turn our eyes to the Best Possible Slippage. While this is also used to ensure a trading system can be viably traded on a certain market or portfolio, we mainly use it to track the performance of the brokers or electronic platforms we execute our clients trades with. With some markets regularly having an opening range with a dollar value range of $100 or more, you can see why tracking Best Possible Slippage is so important. Two accounts trading the same exact system but executing their orders differently can have a great disparity in performance.
Other firms automatically route their orders to the cheapest execution method or platform in order for them to save on each trade. Not only do they not pass these small savings of anywhere from a few cents to a few dollars on to you, but more importantly their “penny-wise, pound foolish” approach could end up costing you thousands and thousands of dollars a year in poor execution.
Worldwide Futures Systems uses our three decades of experience in determining which routing option is best for each order we enter. This method could be phoning the floor broker directly, sending the order electronically to a floor broker or executing the order on a fully automated electronic trading platform such as GLOBEX or eCBOT. This decision can depend on the system, market, order type and also platform or broker performance. Our only consideration is getting our clients the best possible execution. Every execution option is considered. We only use floor brokers who understand and agree with our philosophy on slippage and we hold them accountable. We use electronic platforms if they are more efficient in a particular market.
The important thing is, each and every fill is tracked and analyzed so that we may continually provide our clients with the greatest edge possible. Whatever the slippage costs are you may be experiencing at other trading firms, we are confident we can improve on them.
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