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How to reduce slippage when stop loss is hit
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How to reduce slippage when stop loss is hit

  #1 (permalink)
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How to reduce slippage when stop loss is hit

Hi everyone,

I've started running an automated trading strategy on Ninjatrader 7 (trading a Futures contract) and I've noticed that occasionally slippage can be quite unacceptably large when stopped out. My strategy is set up such that once a trade is triggered, it will trail price by a set amount until price retraces and stops it out. Using this method, I hope to capture as much as the market will give me (minus retracement ofc) but as I say, sometimes profits can be significantly reduced and I encounter surprisingly large slippage, particularly when the market is moving fast.

So the age-old question is, what can I do to reduce slippage to absolute minimum? Eg. is there such a thing as a Resting Stop Limit order that I could use for my stop loss to try and guarantee I exit at my desired price? Or some other method I haven't yet run across? Your advice and insight is greatly appreciated!

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  #3 (permalink)
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Omer עומר / Israel י
 
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rleplae's Avatar
 
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Would need a little bit more detail...

How do you operate ?

Your strategy is updating the stop, as the price moves and when it's hit, you
see a slippage of x ticks compares to the order that was there ?
(In this case nothing much you can do about this)

Or you close out the position when you think it's necessary (which could be
a latency issues, if the price information hasn't made it all the way to your
logic)

What instrument / what timeperiod ?
You may also run into a less liquid market / moment ...

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  #4 (permalink)
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Thanks for your reply.


rleplae View Post
Your strategy is updating the stop, as the price moves and when it's hit, you see a slippage of x ticks compares to the order that was there ?
(In this case nothing much you can do about this)

You're correct. Let's say for example the stop is trailing price by 6 ticks and we are 30 ticks profit. Price retraces 6 ticks and the stop loss is hit. Instead of something reasonable like, say, 1 or 2 ticks slippage, I might see 7 or 8 ticks in a fast-moving market. I recognize this is an "occupational hazard" of stop losses, but there must be a way to minimize this?


rleplae View Post
Or you close out the position when you think it's necessary (which could be a latency issues, if the price information hasn't made it all the way to your logic)

What instrument / what timeperiod ?
You may also run into a less liquid market / moment ...

I'm trading the TF, and the strategy is basically running 24/7 so it's always available to take a trade should conditions arise, same thing with trade exits (stop-outs).

I've done some more research and it seems that there is such a thing as a Stop (Limit) order. I'm wondering if anybody has used Stop (Limit) orders and if so, was it successful? In other words, did you always get out at your desired price? Also, a more broad question: I seem to recall reading somewhere that Futures contracts do not experience "price gaps" during the trading week (unless it's a Market holiday of course). Is this correct? If so, it would add confidence to the notion that Stop (Limit) orders will always get me out at the desired price. If not... I guess I would need another fail-safe?

Thanks again for your comments and ideas.

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  #5 (permalink)
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w00dmann View Post
Thanks for your reply.

You're correct. Let's say for example the stop is trailing price by 6 ticks and we are 30 ticks profit. Price retraces 6 ticks and the stop loss is hit. Instead of something reasonable like, say, 1 or 2 ticks slippage, I might see 7 or 8 ticks in a fast-moving market. I recognize this is an "occupational hazard" of stop losses, but there must be a way to minimize this?


Let me explain how a stop works.

Imagine the market is
1 contracts at 10.1 - 10.2 5 contracts
2 contracts at 9.8 - 10.3 6 contracts
3 contracts at 9.6


An you have a stop/loss for 5 contracts at 10.1

Somebody sells at 10.1

the market looks like :

--------------------- 10.2 5 contracts
2 contracts at 9.8 - 10.3 6 contracts
3 contracts at 9.6

This also triggers your S/L at market, which will get filled 2 at 9.5 and 3 at 9.6
you will have 21 ticks slippage on the 5 contracts


Yes you can use a stop limit order, this will result in

---------------------- 10.1 5 contracts
2 contracts at 9.8 - 10.2 5 contracts
3 contracts at 9.6 - 10.3 6

your 5 contracts will be waiting there as a limit order, no guarantee for a fill and exit

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  #6 (permalink)
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rleplae View Post
Let me explain how a stop works.

Imagine the market is
1 contracts at 10.1 - 10.2 5 contracts
2 contracts at 9.8 - 10.3 6 contracts
3 contracts at 9.6


An you have a stop/loss for 5 contracts at 10.1

Somebody sells at 10.1

the market looks like :

--------------------- 10.2 5 contracts
2 contracts at 9.8 - 10.3 6 contracts
3 contracts at 9.6

This also triggers your S/L at market, which will get filled 2 at 9.5 and 3 at 9.6
you will have 21 ticks slippage on the 5 contracts


Yes you can use a stop limit order, this will result in

---------------------- 10.1 5 contracts
2 contracts at 9.8 - 10.2 5 contracts
3 contracts at 9.6 - 10.3 6

your 5 contracts will be waiting there as a limit order, no guarantee for a fill and exit

Gotcha, thanks, that makes sense. Actually I am only trading 1 puny little contract at this time, but what you've pointed out to me is that, should I ever increase the number of contracts I am playing at one time, I could be left stranded in an open position with unfilled contracts. That's helpful, thank you.

I'm assuming this situation could not occur during a trade entry, could it? Eg. let's say I've got a resting Buy (Limit) order for 10 contracts and price moves up and the "buy" gets triggered, the market would have to "eat through" all 10 contracts at my Limit price before moving up - is that correct? Or could I be similarly left with unfilled, "unbought" contracts?

Thanks again for your help.

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  #7 (permalink)
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w00dmann View Post
Gotcha, thanks, that makes sense. Actually I am only trading 1 puny little contract at this time, but what you've pointed out to me is that, should I ever increase the number of contracts I am playing at one time, I could be left stranded in an open position with unfilled contracts. That's helpful, thank you.

I'm assuming this situation could not occur during a trade entry, could it? Eg. let's say I've got a resting Buy (Limit) order for 10 contracts and price moves up and the "buy" gets triggered, the market would have to "eat through" all 10 contracts at my Limit price before moving up - is that correct? Or could I be similarly left with unfilled, "unbought" contracts?

Thanks again for your help.

I am afraid, that last statement is not correct.
If you are on the buy side (to enter your trade long with a limit order), price can move higher without you getting a fill.

You would then have to chase the price to get a fill

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  #8 (permalink)
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rleplae View Post
I am afraid, that last statement is not correct.
If you are on the buy side (to enter your trade long with a limit order), price can move higher without you getting a fill.

You would then have to chase the price to get a fill

Thanks rleplae,

Hm, I hadn't counted on this being so complicated. Do you have any suggestions on how I can minimize slippage on the buy and sell side? Or am I doomed to use market buy orders and stop loss (market) orders?

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  #9 (permalink)
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w00dmann View Post
Thanks rleplae,

Hm, I hadn't counted on this being so complicated. Do you have any suggestions on how I can minimize slippage on the buy and sell side? Or am I doomed to use market buy orders and stop loss (market) orders?

Quick question : "Have you tested your strategy on ES ?"

Because the ES is such a liquid market, that problem would be almost completely instantaneously solved

On less liquid markets, that is just something that you would have to live with,
not getting a fill, and then make sure you kill your order ! so you don't get a
fill an hour later on the down move...

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  #10 (permalink)
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rleplae View Post
Quick question : "Have you tested your strategy on ES ?"

Because the ES is such a liquid market, that problem would be almost completely instantaneously solved

On less liquid markets, that is just something that you would have to live with,
not getting a fill, and then make sure you kill your order ! so you don't get a
fill an hour later on the down move...

Thanks rleplae,

Good suggestion, and yes I have tested my strategy on the ES, and it didn't fare very well. I really am hoping to be able to get it to work on the TF if at all possible.

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