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Flash proof stop limit orders

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charlotte nc
Trading Experience: Master
Platform: ninjatrader
Broker/Data: NinjaTrader
Favorite Futures: Emini (ES, YM, NQ, ect.)
Posts: 388 since Jan 2015
Thanks: 71 given, 965 received

Hi Virtuose1,

I will just start by saying that I use these a lot and with the high volatility we have seen lately, there have been lots of days that behaved like flash crashes almost. There are definitely pros and cons to using these though.

Pros: These are obvious. You can protect yourself from a large swing in the price against you. You can also capture the spread and use these to scratch trades at a break even, or only lose 1 to 2 ticks if you time your exits with your algo in such a way that you do not cross the spread.

Cons: Depending on when and where you place these, you can have scenarios where you miss your fill and the market moves against your position further and you are left naked. For example if you are trying use a passive exit on the Ask to get out of a long position, this can help you recover 1 tick, but it can also create a risk that you miss your fill and market continues down depending on how far out you place your order. If you are submitting this on the current price level or 1 price level out and the price level quickly moves, then you are exposed to this risk. If the current price level is at bid = 2000 and ask = 2000.25 and you place your stop limit at Sell Ask @ 2000.25, then the only way you are guaranteed a fill is if the Ask queue clears and everyone @ 2000.25 is filled and the price level moves up to Bid = 2000.25 and Ask = 2000.5. But conversely if the price level moves down to Bid = 1999.75 an Ask = 2000 then this implied that the bid queue was cleared and you may not have been far enough up in the ask queue at 2000.25 to get filled. So the market can continue downward without you leaving you naked and afraid (Metaphorically of course).

I typically only use stop-limits 3-5 ticks out from my entry to avoid the very situation i described in my "cons" section. But as long as my execution timing relative to the market speed is fast enough I avoid the scenario I described. To catch a scratch exit or maintain the spread on any other exit, I just use regular limit orders timed perfectly for the current price level to know which side to submit to (The bid or Ask). I usually give my self 3 5 levels to chase that sweet passive exit before I give up and just use the stop limit as my safety exit. Obvious this all has to be done using level 2 event handlers (more granular that a 1 tick chart for example) to optimize what you are reacting to. And unless you are collocating, and writing highly optimized speed efficient code this will not work for you either. For example with Ninja trader if you wait until OnPositionUpdate occurs to react to something you will be too late most of the time.

I also have another layer of code after the stop limit if I hit the "con" scenario I described to cross the spread and get out with a market order. This is only triggered as a last resort though.

I think the use case I have described is fairly common for any serious robust algo trader.

Best of luck out there!


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