Adrian Reid explains why you need to track slippage separately for entries and exits, and differently for each trading system. Trend-following strategies bleed slippage on exits when positions are large and markets collapse. Mean-reversion strategies get hit on entries with market orders, so they need limit orders and liquid instruments like ETFs to survive.
As a trader, you've probably realized that you need to track your slippage, but have you realized that you need to track it separately for entries and exits and separately for each different type of system? Let me explain why.
For one system, often there are different types of orders or there's different market conditions that trigger it. So we need to make sure that we look at those separately. I would not lump them together, especially for something like a trend following system. At the entry, your position is gonna be small. At the exit, hopefully your position is going to be massive. So where would you expect more slippage, the entry or the exit for a trend following system? The exit. Because in trend following system, if you get in on strength, okay, you might be chasing the price a little bit. There could be a bit of slippage. But if the market panics and it collapses, and then your exit gets hit and the market is still collapsing, you might get a lot of slippage on the exit.
Now for mean reversion systems, the dynamic is pretty different because typically on the long side, when you're trading mean reversion, you're getting in on a market panic. So if you buy, you're often gonna end up with a lot more slippage than you intend if you're using a market order. But if you're using a limit order for your entry, then you'll contain that slippage. On the exit for a mean reversion system, you're exiting on strength. And often that's gonna be with a limit order because you've got a profit target in the market or you've got a limit on close order or even a market on close order. Those are not gonna give you a whole lot of slippage. So if you're entering on mean reversion using a market order, that's where you're gonna get the slippage. And that slippage in mean reversion is gonna be a big problem, which is why I really wanna encourage you to use a limit order to get in and also to get out in mean reversion. Because with a mean reversion strategy, the average profit per trade is typically very low. You can't afford to have much slippage. So you need to be really careful with your order types. So make sure for mean reversion especially, you're tracking your slippage and making sure it's not getting outta hand. So depending on the style of system, the slippage profile is gonna be different at the entry and exit. And also the impact of that slippage is gonna be different. So a trend following system with a larger average profit per trade can typically tolerate much more slippage than a mean reversion system. So in a mean reversion system, you wanna minimize it as much as possible by using the right order types, typically limit orders. And you also wanna trade high liquidity instruments. That's why ETFs are so great for mean reversion. For trend following, you do need to monitor your slippage, particularly at the exit because that's where your position is big. And you're exiting during a market panic or during a decline, then typically the spreads will be a bit wider and the slippage could be a little bit higher. If you wanna accelerate your journey to trading success, go to enlightenedstocktrading.com/free to get my free trader acceleration bundle. That'll give you some free resources including cheat sheets, eBooks, and courses to help you accelerate your trading journey. But before you go there, make sure you like and subscribe to the channel so you don't miss the next video.
