Adrian Reid explains how slippage costs affect different trading systems. A 1-2% slippage might be fine for a trend-following system making 40% per trade, but it can kill a mean-reversion system earning only 2% per trade. Focus on execution improvements rather than scrapping your strategy.
Slippage is a silent killer of trading systems, but do you know what to do about it? When you look at your systems in your portfolio and you look at the slippage that you are incurring, what have we gotta do? We've gotta think about what style a system is, how it's entering and exiting, what the average profit per trade is, and what we, what slippage we are getting. And we have to look at all of those things together before we decide whether or not we need to panic about it. If we've got a trend following system with an average profit per trade of 40% and we're getting 1 or 2% slippage on average, doesn't matter. Of course it matters. It's actual money, right? But is it going to kill the system? No. So we're still going to make money with that system, but the slippage is still costing us. So we want to try and manage it and reduce it, but we don't need to panic about adjusting the system or, you know, changing everything. We just need to think a little more carefully about our execution. But if we're trading a mean reversion system that has a 2% average profit per trade and it's not using limit orders and we're finding we're getting 1-1.5% slippage on average, do we have a problem? Oh yeah, we have a problem. Absolutely. We're almost breaking even And it's very, very volatile, the equity curve. So we've got to think about these things in context, not just looking at the raw numbers. Think about it in terms of the numbers relative to the system. If you want to learn more about successful systematic trading, we've got more videos like this on the Enlightened Stock Trading channel. I'll see you there.
