4. Understand the house edge. This is key, and most people don't even bother to deconstruct the house edge down to see where there break even line is at. Market Orders - 1 tick, Commissions - $3- $5 dollars per trade, Slippage - 1 to 2 ticks, Toxic fills, 1 tick on limit orders. This adds up to a house edge against you. Depending on your order types, your broker, your platform, your trading style, there will be different cumulative house edges, but you have to know this. Because in the end you have to not only cross the 51% threshold on just your betting line but also account for beating the house edge.

what's a toxic fill?

Hi Arch,

Thanks for taking an interest in this topic. A toxic fill is when your limit order entry gets filled as a function of the market trading through your price level. Being in the back of the queue you typically only capture a fill by virtue of adverse selection. And because of this, you end up starting your trading with an instant - 1 tick position.

Here is a scenario to illustrate this.

You join the queue of Bids late and you are number 98 in the queue and there is a total volume of 100 Bids. On the Ask side there is a total volume of 500. The market orders take out all 100 Bids before they take out all 500 Asks, and by the time you get filled ( you are # 98 out of 100 in line), the Bid side collapses driving the price down by 1 tick to the new lower bid ask price level.

By contrast the ideal state every trader is hoping for (whether they realize this or not) is to be on the opposite side of this scenario. When the 100 Bid orders get taken out, at least some portion of the 500 Ask orders would have gotten filled as well. Although we can tell that for sure not all 500 ask orders were filled, those in the very front of the queue would have gotten filled. As a result of choosing the right side and being early enough in the queue, they will start their trade with a + 1 tick profit.

So to give you an idea where everyone in the retail world falls into these scenarios here is short answer.

1. You will get filled 100% of the time on the side that loses by virtue of the fact that in order for this side to collapse everyone in line has to get filled. (This is the toxic fill)

2. You will only ever catch a fill on the winning side if you are far enough up in the queue to get filled before the opposite side breaks. Due to the fact that only the top k % of the winning side will get filled, you will typically not make this cut even though you picked the right side. So you might pick the winning side and get filled only 10% to 25%.

With points 1 and 2 in mind, I estimate for the average retail trader a toxic fill rate over 80%.

So for anyone trying to figure out their overall expectancy I would advise using this assumption vs. the assumption that a limit order entry will get you flat to start the trade.

For those interesting in researching how to improve your toxic fill rate.... This is a whole different discussion. I have a thread started here for that.

What is your toxic fill rate? This is a topic that I think is very critical to every trader but is often overlooked. So I just wanted to kick this off as an open discussion so we can share ideas, strategies and gain some best practice insights on how to improve this statistic. For …

Thanks,

Ian

Thank you for explaining with detail. Is this mainly a concern for scalping strategies of a few ticks?

When I enter market orders based on my setups, I get filled with 0 to -2 ticks spread, then it is recovered after a few seconds to a minute depending, on the strength of the prevailing trend. Sometimes when the price whipsaws, and I've set a limit order, I've instantly received +1 to +3 ticks.

I do agree with having a conservative back testing expectations (double the expected slippage and commission, and if you come out on top with a good MFE & MAE, then the strategy could be promising).

I hope that this thread develops well and provides insight that can be used to perfect guys individual approaches to trading.

I want to respond with some depth but I have to begin by being brief on broad topics because I'm pinched time wise and cant afford distraction.

IMO the only way to learn, certainly the best way, is to actually trade. If your capitalization combined with the volatility of your chosen instrument, trade frequency and time frame make trading impossible you should alter those items to the point that you CAN sensibly participate. If you'd like clarification or examples, just ask.

Some will say sim trading and backtesting. I do not want to discredit those individuals but I strongly disagree with that approach. Trading is an emotional monster. SIM disengages reality, specifically on the downside. Again, happy to provide clarification or explanation. Backtesting, especially in the low latency world of under ten round trips a day past a very cursory "might this work", is a complete waste of time.

The first fork that folks come to is knowing if they are subjective (discretionary) or objective (rules based). Define the primary approach and keep it as simple as possible.

Price action is absolute KING, especially in day and swing timeframes.

Use as few "indicators" as possible.

When you do use indicators, make sure they are complimentary based on a hierarchy or confluence and non-colinear.

Be skeptical that anything "for sale" has a market price greater than the salesman could make during that time trading it himself. MOST of the absolute best visual way points that I have ever seen are available on this site for free.

More later if anyone cares.

Dan

If you are not ready to have overnight risk or have any skin in the game I would not trade. I think it is human nature to have quick gains without any risk but trading and investing do not work like that.

Not to be downer, but I see many wasting countless hours on these complex scalping methods on here. Many have come and gone on this forum, very few people are profitable scalping why even waste the time and money. Buys some shares of AAPL or VTI and actually make money