Can You Avoid Slippage When Scaling Up a Trading System?

So the question is, how much money can I allocate to a certain system without slippage being a problem? And can I figure that out in advance rather than waiting until real life trading to see if there's actually a problem? The first thing I would say is start with what is the position size at different levels of capital allocation? So let's take a broad based, trend following system that holds 25 positions in its portfolio, just as an argument's sake, and let's assume that they're evenly sized positions. Every position starts off the same percentage of your account. Okay, if you allocate $100,000 to a system like that, you've got 25 positions. Each position is going to be approximately $4,000.

Then you want to have a look at the liquidity filter on the system and ask yourself, okay, is a $4,000 position given $100,000 allocation to this system? Is a $4,000 position likely to cause me slippage problems with the minimum turnover requirements that this system has? And so if you have a minimum turnover requirement of half a million dollars per day and you're trying to get in and get out of trades at about a $4,000 size, then you can ask yourself, okay, is that reasonable? Would I expect large degrees of slippage by doing that? Given the average turnover? And 1% is pretty low? Yeah, particularly if you use an algo order to enter. So not just a straight market order, because a straight market order just gets dumped into the market with everyone else, gets instantly executed at whatever available price there is. You'll get more slippage. If you have an algo order, it will go into the market a bit more carefully and it won't just hit every, every offer. I think at that sort of level it's fine. Once you're hitting 5% or a little more, you want to start really watching it closely because there's a risk that you start to move the market with your position. And that's not a hard and fast rule. I'm just thinking, okay, based on my experience, where does it start to become a problem? The next step after that is if slippage starts to become a problem. You've got several ways to deal with it, right? You can reduce your allocation to that system, you can do parameter set diversification, or you can add other systems that are different so that your capital allocation for each system across your whole portfolio goes lower. At $100,000 with several systems in your portfolio, slippage is not really going to be a huge issue. At a million dollars with five systems in Your portfolio slippage could be an issue for some of them, but not others. At a million dollars with 1015 systems in your portfolio, slippage is not really going to be that much of a problem, most likely, unless you're trading very illiquid stuff. But you should only be trading very illiquid stuff if it's got a huge expectancy, like long term trend following. Yeah. Then if you get a bit of slippage, the system can survive it. If you're trading $10 million, then you've really got to start to think about, okay, how much slippage am I getting? How broadly diversified am I? And calculate from that total account size down to the system, all the different parameter variations, and then look at your position size and, and just make sure it's reasonable. But the bigger you get, the more of a problem it's going to be and the more you want to push up your liquidity filter as well. So understanding and managing slippage is an important part of active trading, but it means nothing if you don't have a backtested system you have absolute confidence in. So watch this video where I answer all of your questions about backtesting so you can develop a system that you have absolute confidence in. And don't forget to subscribe to the channel so you don't miss out on any new content that we release.

Sam.