I would like to solicit experience based opinions about expected slippage vs order size during regular session hours, especially for the ES, TF, CL, and 6E.
I currently do optimizing with 1 contract and 1 tick slippage. The 1 tick seems to reasonably reflect my own real-world exerience with 1 contract orders. What I would like to know is how far I can expect to scale the results with multiple contract orders before expecting excessive slippage.
Slippage occurs with market orders only. If you use limit orders there will be positive slippage. In case you enter a market order, there are different cases to consider:
What causes slippage?
(a) Your order size exceeds the number of contracts available at the best bid or offer and part of your order is executed at worse price. The slippage is created by the market impact of your order.
(b) Between the moment you made the decision and the moment your order is executed, the market has moved 1 or several ticks. This depends on the lower timeframe volatility of your instrument.
Which factors have an impact on slippage?
The slippage under (a) will only occur, if you trade size, it can be neglected, if you just trade 2 or 3 contracts.
Both (a) and (b) depend further on the size of the order book, in particular the size of the best bid or best ask.
The slippage under (b) is created by micro-volatility, which itself is a consequence of an uneven distribution of orders.
The slippage further depends on the tick size, as the expectancy for the slippage will be the product from tick size and average slippage measured in ticks.
How to estimate slippage?
proxy for order book -> average volume per 1 min bar
proxy for micro- volatility > average true range of a 1 min chart, assuming a similar skew for all instruments
proxy for tick size -> tick size
If you assume that there is a linear relationship between slippage and normalized volatility and an inverse relationship between slippage and volume, you might take the expression
S = NVI / Volume as a first proxy for the slippage
Measured the average NVI and Volume for a 1 min chart on September 27
ES : 41.4 / 1,650 = 0.03
6E : 22.2 / 182 = 0.12
YM : 27.3 / 120 = 0.23
CL : 52.5 / 190 = 0.28
and you will find confirmed, what you would have expected. Highest slippage will be found for CL, lowest slippage for ES. The numerical values do not have a meaning, but were just established to create a ranking. For further examination of the size of slippage see also paper below.
Per roundturn one tick corresponding to the bid/ask spread has to be added as well.
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Theoretically, (b) is an option, but not a reality, so one is faced with (a) and (c).
In addition, the lost opportunity from (c) will hurt overall profitability if one has a statistical edge with market orders, slippage notwithstanding.
As an active trader in both robust and thin instruments, who has used both limit and market orders, I can attest price will invariably trade through a limit after a fill. In other words, price has moved against me after a limit is filled.
Haha! In thin instruments it is reality, in highly liquid instruments such as ES it may never happen.
Correct, but if you do not get filled, you do not need to bother about slippage. This is lost opportunity.
I may return your favour here: This is simply false.
If you enter on a limit order, the thing you wish is that price trades through the limit, don't you? If you exit on a limit order and price trades through the limit afterwards, it tells you that your exit was well chosen. So in any case, you will be quite happy, if price trades through the limit after a fill!
I think you confused limit orders with stop-market and/or market-if-touched orders.
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