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BOOK YOUR FREE STRATEGY SESSION NOW >>When an order is executed at a price differing from the one we set we talk about "slippage", a phenomenon that systematic traders know all too well, given its negative impact on the performance of trading systems.
In this video we reveal a little trick to limit the slippage phenomenon.
The trick consists in using special orders that are executed with higher priority than stop orders.
If you want to know more, don't miss this video!
By watching it, you’ll discover:
- What kind of orders you can use to limit slippage
- How to configure these orders inside MultiCharts and Interactive Brokers
- How to quickly modify the code of a strategy to take advantage of these orders
Enjoy the video! 😎
Hey everyone and welcome back! One of the coaches of Unger Academy here, and today we’re going to be talking about slippage and how it can be, at least partially, limited through the use of a particular type of orders.
Okay, so as mentioned in the intro, we're going to be talking about slippage, which is the difference between the real price given by the market and the theoretical price at which I'd like to enter the market.
Slippage is a cost for us traders and it mainly arises in stop orders, stop market orders. Suppose I wanted to buy Crude Oil at this price level. So, when the market touches this price level the broker will send a market order to buy Crude Oil.
It's clear that in the meantime the price is moving, the price is going up. So my order could be executed at a higher price, maybe a few ticks above or, in case of a really accentuated fast market, even at a much higher price.
This is a very common aspect in breakout systems and in systems that work on volatile underlying assets such as commodities.
How is it possible to limit this problem? It can be done by using stop limit orders instead of the traditional stop orders. But what does this stop limit order basically say? It says that when the price reaches my trigger level, a limit order will be sent in the book, which can be lower or higher than the market price.
Obviously, if we insert it at a lower price, it might not be executed. However, if we insert it at a higher price, well then it will definitely be executed, unless the market is so fast that it has exceeded even this entry level.
So, what I want to tell you today isn't: "use a close level so if the slippage is too much, you don't enter the position". What I want to say instead is: "use a wide level as if it were a real stop order."
This is because by doing so, and using a particular feature of MultiCharts combined with Interactive Brokers, it's possible to let the order reside on the exchange instead of leaving it in the broker's belly.
If we take a look at Interactive Brokers' guidelines, you'll see that for futures orders, stop orders are simulated by the platform.
What does this mean? It means that Interactive Brokers holds them. After the entry level is triggered, then they will be sent to the exchange.
So, as soon as the entry trigger is broken, which perhaps is monitored and used by many traders, such as the highest high of the previous day, the broker will submit the order to the exchange. So, we risk arriving late in the line of many orders before ours.
Vice versa, if our order is already on the exchange, we'll have a priority over all the other traders.
In order to place our orders on the exchange, it's necessary to use stop limit orders that have the feature of being able to be triggered outside the "Regular Trading Hours".
You can see that the "stop limit orders", in this case on the CME market, will be sent to the exchange using the GLOBEX native type orders. The same goes for ICE. Also in this case, using stop limit orders that can be triggered outside the Regular Trading Hours, native type orders will be used.
So, this means that the orders will stay on the exchange. By doing this, we'll have the priority, because our order is already on the exchange, compared to the flood of orders that may arrive after ours at the break of a sensitive level of the market.
How do you do this on MultiCharts? I'm going to explain that to you right now. Go inside "Broker Profiles". Let's disconnect "Interactive Brokers". Let's go inside the Broker Profile and let's check "Use outside regular trading hours" and let's uncheck this box that usually is checked by default.
So, let's say, we don't use the native OCO Group orders. The configuration is this: flag "Outside regular trading hours" and deflag "Use native OCO Group".
By doing this, we're able to use the stop limit orders and send them to the exchange. So let's do a quick test.
I wrote this short code to test these two different types of orders together. There is an input called "Stop_StopLimit" and if it has the value of zero, there it is, we'll place a normal stop order. So, at what level? Let's place an order at the next bar, at the closing level of that bar plus 1%, ok?
Otherwise, if this input has a number other than zero, we'll place a buy order with a stop order at 1% but you see that after that I've also added a limit order at 1.1%.
This is the syntax to send a stop limit order. So, we need to insert the stop price and immediately afterwards the value of the limit price.
At this point, let's go back to the platform. Let's go look at the input the system has right now and insert zero. So a traditional stop order. Let's activate the system and see that the system is going to place a stop order.
Here it is. Ok. Let's also see what happened on the Interactive Brokers platform. We have a pending buy stop order on Crude Oil. And you can see that this box is colored blue.
When this box is colored blue, it means that the order is being managed by the broker.
We'll now deactivate the system. We cancel the order and reactivate it by changing the input. So, we select input equal to one, thus using the stop limit. Let's activate the system again and the order stop limit will appear.
Let's take a look at the platform now. The order is green, so it has a different color. This means that the order is already on the exchange.
This can be an advantage over all other orders that come from brokers, such as traditional stop orders.
Alright guys, I've explained the trick to you. Now it's up to you! See if you're interested in this and remember to check on each exchange if these types of orders are accepted and if they work in the same way as on the American futures because each exchange has its own rules.
From a trading viewpoint, you've seen that it's very simple to modify the codes. It's sufficient to add the limit value to the buy or sell line. So, in a very short time, you can modify your codes. Obviously, you'll need to modify the settings and well, that's it.
Before closing I want to leave you with a tip: if there is someone out there among you who's interested in learning more about systematic trading, I'll leave you a link in the description of this video. Through this link you can access a free presentation of Andrea Unger introducing you to his method, which allowed him to win the World Championship of trading with real money 4 times. You can also get the best-selling book "The Unger Method" covering only the shipping costs, or even book a strategic talk with one of our tutors.
Before saying goodbye, I invite you as always to please leave us a Like if you liked the video, subscribe to our channel and click on the little notification bell.
And with that we will see next time, thanks so much. Bye-bye!
We'll help you map out a plan to fix the problems in your trading and get you to the next level. Answer a few questions on our application and then choose a time that works for you.
BOOK YOUR FREE STRATEGY SESSION NOW >>Hi, I'm Francesco Placci, a professional trader since 2005 thanks to the systematic approach to the markets.
My skills range from trading on index futures to bonds, from stocks to commodities, with a particular focus on volatility and options, which I consider to be among the most versatile and fascinating instruments available to traders.
After an experience with leading Italian credit institutions where I learned the basics of institutional finance, I became a successful independent trader, with great personal satisfaction.
Founder of Algoritmica.pro, in 2019 I joined Unger Academy as head of Research and Development.
