Slippage for trend following system

[Zr1Trader]

Quote from cgeorgan:

Limit orders: You need to model for price to trade through. Ensure that your software doesn't do a "one-touch" and fill you. This is important for both entries and exits (that will cover your slippage on limit orders).

Market orders: 1 tick of slippage every time. If it's a market entry and a market exit, that's 2 ticks total, per contract.

Stop orders: 1 tick of slippage each time. For live trading, you're best off using a stop-limit that has a limit of 10-15 ticks past your stop price (trust me). Yes, it sounds like stop-market, but that time you don't get filled is the time you really pay for it.

Backtesting is OK to start, but you need to forward test on live data for at least 3 months, better 6 months (I think a year is a lot if you're running the thing daily).

2 cents.

Great response, just what I was looking for. I have been testing limit orders and making sure price trades through so I have that part down. My only question left is slippage regarding reverse orders? Is there any benefit to using reverse orders when it comes to slippage?

 

[cgeorgan]

Quote from Zr1Trader:

Great response, just what I was looking for. I have been testing limit orders and making sure price trades through so I have that part down. My only question left is slippage regarding reverse orders? Is there any benefit to using reverse orders when it comes to slippage?

Unfortunately, I don't model "reversing" orders - I have signals that generate targets and exits...once I'm out, I'm out until the next signal.

However, I'd say that it's unrealistic to assume that if you reverse (add a tick of slippage on the stop), you need to do the same on the reversing order - so one tick should be fine (two ticks is "extra cautious").

You'll find the greatest slippage on a reversing order in a fast market where the bid-ask spread is thin, like Natural Gas, Gasoline, etc. You won't have that problem with ES or other liquid indices.

 

[cokezero]

Quote from Zr1Trader:

I'm talking in regards to slippage.... reverse orders vs just plain old stop orders, any advantage or disadvantage? Dissaster stops would be present. But thank you for your input.

I'm wondering if I'm better off with a long only approach or a long short approach in regard to slippage. If I am long the exit signal would be the same thing as a sell signal if i was using the long short approach.

the only disadvantage of a reverse order is it doubles the size of your trade at a single trade location. Its more of a scalability issue than a performance issue. If possible try to exit first before reverse to avoid trading twice the size at a single point. Revere orders effectively halves the scalability of any strategy that takes liquidity.

 

[cokezero]

as for your slippage question it really depends on the market and how aggressive the market makers are in providing liquidity. It also depends on how volatile the current market is as well as where the price level is. Expect higher slippage in volatile days and expect higher slippage at higher price level and vice versa. You can get a fairly good idea by looking at some realtime market depth for a few days. There is no easy way to estimate exactly how much slippage you may experience so the rule of thumb is to better over estimate it a bit by throwing in a safety margin.

 

[Zr1Trader]

Thank you for the replies very helpful.