Using Limit Orders to Reduce Slippage

Jez Liberty made two recent posts on the issue of slippage:

• Slippage: Are your back-testing results realistic?
• Follow-Up on Slippage.

Check out the comment sections, too.

I was curious about using stop-limit entry orders as a strategy to limit slippage. This is only feasible when you know your trigger price in advance. The trade-off is that some orders will not trade, but those that do have no slippage of the “execution risk” variety.

I completed the following analysis:

1. Read in OHLC data for 40 contracts available at Trading Blox.
2. Use 20 / 5 day price channel for entry / exit.
3. When an entry is triggered increment a market-trade counter (MTC) and record the Trigger Price.
4. If the limit entry order would have executed:
   • Price returns to the Trigger Price
   • Exit price has yet to move past Trigger price
   • Any day after the trigger day
   • Before exit is triggered

   increment a limit-trade counter (LTC).

5. Calculate LTC as percent of MTC
6. Calculate mean and standard deviation over all 40 contracts.

84.1% +/- 3.8% of all longs and 84.7% +/- 4.3% of all shorts would enter on the limit order. So, 84% +/- 4%.

Note:

• Percentage is understated – the Trigger day is excluded.
• This only reduces slippage on entry.
• No analysis is made of the relative profitability of missed trades.