Stocks & Commodities V. 30:4 (38-40): Defeating Slippage by Zoltan Csesnick

Stocks & Commodities V. 30:4 (38-40): Defeating Slippage by Zoltan Csesnick
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Defeating Slippage by Zoltan Csesnick

Slippage is one of the biggest problems for traders to overcome. While there are no ways to defeat slippage completely, here are four ways to decrease it significantly.

For many traders, slippage is the single biggest problem. For those who are not trading reversal strategies where they can be easily filled with limit orders, slippage, which is also known as price deviation, can easily destroy a strategy.

Itís a traderís catch-22: markets are designed in such a way that if we want a sure fill, we need to go with stop market/market orders. But if we place a stop market order, we will suffer a slippage. In other words, slippage is the difference between the filled price and the desired price, and it represents the narrow path on which traders must walk.

There is no way to completely eliminate slippage, but there are ways to decrease it significantly. Here are four ways to do so.

LIQUIDITY

The bid-ask spreads tend to be much lower for stocks with larger volume. I donít think I am revealing a big secret by saying that trading large-cap stocks or at least stocks with an average volume of more than a million will provide you with much better fills. And there are enough of these stocks, not to mention other futures products and forex pairs/crosses. But I specialize in stocks, and my experience comes mainly from trading them, so thatís what I will stick to discussing here.

Before you trade a stock or include it in your portfolio, you should always watch the Level 2 quotes and observe the bid/ask for a while. If you trade moderate risk (few hundreds of stocks), it is easy to find well-performing stocks with relatively small volume and a tight bid-ask difference.




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