Adrian Reid shows how slippage can wreck mean-reversion strategies. A system with 1.5% average profit per trade survives slippage better than one with 0.75%, even when expectancy and drawdown stay the same. Market-order traders should prioritize higher per-trade profits when tuning parameters.
Slippage can very easily kill a mean reversion trading system, but there's one tip you can use when you're designing a trading system to make sure that it's less of a problem than it otherwise would be. And that's to optimize for a higher average profit per trade, even if the other stats like compound return and max drawdown are the same. Because a higher average profit per trade reduces the impact of slippage on your trading system.
If you've got a mean reversion system and it looks great and it's giving you 0.75% expectancy, average profit per trade, and you're making choice between different rules or different parameter values. What if you made a different choice and that gave you 1.5% average profit per trade? Same profitability, same compound returns, that same max drawdown, but different average profit per trade. One is going to be more prone to slippage impacts than the other. So when we're choosing our parameter values in our system, we might want to be a little bit cognizant of this. If it's a system that's prone to slippage. If it's a limit entry and exit system, then it's not going to be so much of a problem. But if it's a market entry and exit system, then you might adjust your parameter values to get a higher expectancy, even if it doesn't improve the return.
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