How Slippage Prices & Spread Affect Trading Performance
Dear readers & investors we have interesting information about spread and slippage prices and their affects on trading performance. Many professional traders know this fact but majority of common traders do not have enough detailed information about these kinds of information.
Unfortunately most of the traders worldwide take small profits like 20, 30, 40 or 50 pips without strict stop loss defined points. Here I will tell you errors of trades in form of slippage prices and spread. For example you have the intention to take profit of 5 points in XAUUSD in breakout strategy then you will have to calculate additional expenses of trades as well. Here is the example
1. Gold spread is 0.5
2. According to reliable statistics there is always 0.5 to 1.5 average points for slippage prices, sometimes according to my personal experience it could be 5, 7 or even 10 major points which is very serious sign
So we have to examine how spread and slippage prices effect your trading. For example for breakout strategy you buy XAUUSD at 1585 and you set limit of 1590 and stop 1580. You should cautiously remember if you place buy stop at 1585 and the current market is trading at 1582 then you will be given a price of 1585.6 or 1586.1 or even higher but here we will include average slippage prices. So your placed price was 1585 and executed price is 1585.6 which is 12% of the total size of your trade. Here note that 12% of your limit price 1590 is reduced due to slippage execution. Even if you will enter in market by market instant order still broker gives you 0.5 to 0.7 against and even in fast market move you can miss entire profitable trades because market does not allow entering manually. So your take profit is set total of 5 points and 12% is gone in bad execution during the fill of your buy stop order.
Now come to the point where spread also matters. With most of the brokers spread for gold is 0.5 which becomes 10% of the 5 point trade size. You will have to bear this 10% in form of spread during the entry of trade and nobody can escape from it. Also remember your take profit limit is 1590 and it does not mean when market will touch 1590 in ask price then there would be 1589.5 in bid price and your limit will not be executed but if you were seller at 1585 and your stop was 1590 then at the price of 1589.5 your stop of 1590 will be executed even market does not touch 1590 due to spread price difference in bid and ask. So this is another additional 10% expense of trade at the time of exiting. Perhaps common traders cannot understand these numbers due to having less experience and depth knowledge but professional traders can realize about all these expenses. Let’s conclude the main point
1. 12% of the trade size goes in slippage prices at the time of entry
2. 10% is spread at the time of entry
3. At the time of exiting again you may face slippage price which is average 12% of the trade
4. If your trade is going to hit limit then spread does not matter at take profit limit at the time of exit but if your trade stop is touched then you will face additional spread cost at the time of execution price may not touch your stop level but your stop would be executed due to difference in spread amongst bid and ask
5. If stop loss level is touched which is 1580 then you will be trade out even ask price shows 1580.5 which is not your stop loss level
Surprisingly either your trade goes in profit or loss you will have to bear certain cost 12%+10%+12%+10%=44% loss which is fixed and you cannot avoid in case of touching your stop loss level and 44%-12%=32% in case of touching your take profit level.
Note: the above example is mentioned based on breakthrough strategy and for consolidation strategy you will also bear spread and slippage prices in any one sided direction. Suppose current market rate is 1582 and you place sell limit at 1585 then you will be avoided from slippage prices due to opposite direction of your trade as compared to market move but your stop of 1590 can be executed at 1591 or higher and at this time of stop loss level you cannot avoid slippage price again, So in consolidation slippage expenses becomes half of the breakout strategy. Liquidity providers and brokers want you to place opposite of the market move and I personally do not like consolidation strategies until strategies are entirely and completely tested and verified historically. I do follow some consolidation strategies but those are developed by deep mathematical consideration with high probability merits
Following are the overall statistics based on trade size regarding slippage prices and spread cost
5 points trade size= 0.6+0.5+0.6+0.5= 2.2 points certain and fixed charges which is 44% of the trade
10 points trade size= 0.6+0.5+0.6+0.5= 2.2 points certain and fixed charges which is 22% of the trade
20 points trade size= 0.6+0.5+0.6+0.5= 2.2 points certain and fixed charges which is 11% of the trade
Either you do 5 point trade size or 20, in both cases spread and slippage prices remain fixed, so it’s better to trade with 10 or higher points.
Solution of spread charges and slippage prices
Trade-council.com management has researched a lot to handle this issue without increasing risk factor and propose the following solutions
1. You can increase size of the trade, increase in trade size does not mean to increase in lot size
2. You can increase lot size to adjust spread and slippage prices but this is very technical point and all burdens of spread and slippage prices should not be kept on single trade. Increasing lot size to adjust spread and slippage prices should be slighter
3. You can allocate some portion of the basic lot size at different ideal prices of market move
4. You can maintain separate file to calculate spread and slippage prices of all loss and profit trades to adjust in any next 3-5 profitable trades
Often worldwide traders cry and write bad reviews about brokers on internet at different forums. Most of the trading issues are related to spread and jump prices or slippage prices. If someone is interested to learn all above matter in detail then we recommend to attend our seminars or private workshop can be requested by contacting us.