How Slippage Prices & Spread Affect Trading Performance
Dear readers & investors:
We have interesting information about spread and slippage prices and their effects on trading performance. Many professional traders know this fact but majority of common traders do not have enough detailed information about these kinds of information.
Alas, most traders worldwide take small profits like 20, 30, 40 or 50 pips without strict stop loss defined points. Here you will find errors of trades in form of slippage prices and spread.
For example: if you have the intention to take profit of 5 points in XAUUSD in breakout strategy, you will have to calculate additional expenses of trades as well. We can assume a scenario below:
- Gold spread is 0.5
- According to reliable statistics, there is always 0.5 to 1.5 average points for slippage prices. Sometimes, according to our personal experience, it can be 5, 7 or even 10 major points – i.e., very serious sign.
So, we have to examine how spread and slippage prices affect your trading. For example: Suppose that for breakout strategy, you buy XAUUSD at 1585 and you set limit of 1590 and stop 1580. You must cautiously remember if you place buy stop at 1585 and the current market is trading at 1582, you will be given a price of 1585.6, 1586.1 or even higher. Nevertheless, here we will include average slippage prices.
So, your placed price was 1585 and executed price is 1585.6, i.e., 12% of the total size of your trade. Here note that 12% of your limit price 1590 is reduced due to slippage execution. Even, if you will enter in market by market instant order, broker still provides you 0.5 to 0.7 against. Even in fast market move, you can miss entire profitable trades. It is because; market does not allow entering manually. So, your take profit is set total of 5 points and 12% is gone in bad execution during the fill of your buy stop order.
Now, come to the point where spread also matters. Most of the brokers’ spread for gold is 0.5, which becomes 10% of the 5 point trade size. You will have to bear this 10% in form of spread during the entry of trade and nobody can escape from it. Also remember your take profit limit is 1590 and it does not mean when market will touch 1590 in ask price. In this case, there would be 1589.5 in bid price and your limit will not be executed. Nevertheless, if you were seller at 1585 and your stop was 1590 at the price of 1589.5, your stop of 1590 will be executed even market does not touch 1590 due to spread price difference in bid and ask. So, this is another additional 10% expense of trade at the time of exiting. Perhaps, common traders can’t understand these numbers due to having less experience and small depth of knowledge. Nevertheless, professional traders can realize about all these expenses.
Let’s conclude the main point:
12% of the trade size goes in slippage prices at the time of entry.
10% is spread at the time of entry.
At the time of exiting again, you may face slippage price which is average 12% of the trade.
If your trade is going to hit limit, spread does not matter at take profit limit at the time of exit. Nevertheless, if your trade stop has touched, you will face additional spread cost at the time of execution price. You may not touch your stop level but your stop would be executed due to difference in spread amongst bid and ask
If stop loss level is touched (which is 1580 in above given scenario), you will be traded out – even if ask price shows 1580.5 that is not your stop loss level.
Surprisingly; either your trade goes in profit or loss, you will have to bear certain cost; i.e., 12%+10%+12%+10%=44% loss which is fixed.
Moreover, you cannot avoid this cost in case of touching your stop loss level and 44%-12%=32% in case of touching your take profit level.
Note: the abovementioned example is based on breakthrough strategy. For consolidation strategy, you will also bear spread and slippage prices in any one sided direction. For example: if current market rate is 1582 and you place sell limit at 1585, you will be avoided from slippage prices due to opposite direction of your trade as compared to market move. Nevertheless, in this scenario, your stop of 1590 can be executed at 1591 or higher and at this time of stop loss level you cannot avoid slippage price again. So, in consolidation, slippage expenses become half of the breakout strategy.
Liquidity providers and brokers want you to place opposite of the market move. Nevertheless, we personally do not like consolidation strategies until strategies are entirely and explicitly tested and verified historically. We do follow some consolidation strategies; nevertheless, those are developed by deep mathematical consideration with high probability merits.
Following are the overall statistics based on trade size regarding slippage prices and spread cost:
5 points trade size = 0.6+0.5+0.6+0.5= 2.2 points with certain and fixed charges that are 44% of the trade.
10 points trade size = 0.6+0.5+0.6+0.5= 2.2 points with certain and fixed charges which is 22% of the trade.
20 points trade size = 0.6+0.5+0.6+0.5= 2.2 points with certain and fixed charges that are 11% of the trade.
Either if you decide to execute 5 points trade size or 20 points trade size, spread and slippage prices remain fixed. So, it’s better to trade with 10 or higher points.
Solution of spread charges and slippage prices
TopFundmanagers.com management has researched a lot to handle this issue without incrementing risk factor and proposes the following solutions:
- You can increase size of the trade. Please note that increase in trade size does not mean to increase in lot size.
- You can increase lot size to adjust spread and slippage prices but this is very technical point and all burdens of spread and slippage prices must not be kept on single trade. Incrementing the lot size to adjust spread and slippage prices must be slighter.
slippage prices should not be kept on single trade. Increasing lot size to adjust spread and slippage prices should be s
- You can allocate some portion of the basic lot size at different ideal prices of market move.
- You can maintain separate file to calculate spread and slippage prices of all profit and loss trades to adjust in any next 3-5 profitable trades.
Often, worldwide traders feel irritated and write bad reviews about brokers on Internet at different forums. Most of the trading issues are related to spread and jump prices or slippage prices. If you are interested to learn all above matter in detail, we recommend that you must attend our seminars or private workshops. You can request to schedule your space by contacting us.