|
PureBytes Links
Trading Reference Links
|
Slippage is only relevant when using STOP orders to enter/exit the market.
It's the difference between the stop price and the actual price you get. In
markets that are "fast" at the time your stop price is touched, slippage can
be very costly!
The rule of thumb in any market is that your fill should always come before
or at the point of "1 tick back". Suppose the market is currently at 90 and
you are using a breakout system and want to buy at 100 on a stop. Let's say
the market then trades upwards like this:
98
99
100
101
102
103
104
103
104
105
106
If the market was "fast", you could get filled anywhere between 100 and 104.
So your slippage could be anywhere from 0-4 points. Note that after 104 the
market went briefly down a tick to 103 before going up again. This is your
clue that 104 should be the WORST price you get. In Chicago they apply this
rule quite rigourously. If your broker tells you that you were filled at
105 or 106 because of a fast market ...you should raise hell!
Note:
Using STOP-LIMIT orders can control slippage. Any trading book will desribe
the difference between a Stop and a Stop-Limit order. Basically, a stop
order becomes a marker order when the price is hit, whereas a stop-limit
becomes a limit order when the price is hit. A stop-limit can either be at
the same price "but at 100 on a stop-limit" or at two different prices "buy
at 100 stop with 101 limit". Obviously, the risk with Stop-Limits is that
you never get a fill. Therefore, they are very useful when initiating a
trade (to eliminate or reduce slippage) and very bad when exiting a losing
trade because you might not be filled. The plain stop order guarantees you
a fill. Hence pro's and cons with each order.
Simon.
|