Adrian Reid explains why minimum price or volume rules alone don't stop slippage. He shows how both cheap high-volume and expensive low-volume stocks can still slip due to wide spreads and hidden liquidity issues. His solution: filter trades where price times volume exceeds a threshold.
If you're dealing with slippage in your trading systems and it's getting out of control, sometimes the answer isn't one simple rule. You need to dig in and look trade by trade at what's actually causing it to come up with the right hypotheses to test to improve your trading system. I've had problems in all sorts of combinations. Low price stocks with low volume, low price stocks with high volume. You can still get slippage. High volume stocks with a low price. You can still get slippage. A lot of people, you know, a lot of books will say you need a minimum price and you need a minimum volume, and that's how you do it. I haven't really found that eliminates the problem entirely. But what I would do is if you are getting a slippage problem with a particular system, look at the trades that you had big slippage on and see if you can form some hypotheses to test. If the liquidity filter was passed because it's a high-priced stock, like it's a $1,000 stock, but it traded 20,000 shares that day. So the turnover looked good, but actually it wasn't that liquid. There was a wide spread. It just, you know, then that could give you one set of hypotheses. And if it's a a very low-priced stock with a very high volume that, and you still got something that gives you a different hypothesis. And it's going to be different depending on the market, depending on the system. So I think my guidance is dig in and look what's actually happening and then use that to make, to drive the hypotheses for testing. Yeah, it's a bit of a non-answer, but I don't think having, requiring a high volume solves the problem. Yeah, there is something to do with price and volume. There is something to do with account size. I've always just settled on price times volume has to be above a certain number. It's easy and it doesn't seem to have any more downsides than any other approach.
