All About Slippage
By Dave Mabe
Over the next few days, I'll be focusing on one of the most important and misunderstood topics among systematic traders: SLIPPAGE
When I say slippage, this is the definition I'm referring to:
Slippage is the difference between your ideal fills in your backtest and the actual fills you get trading live.
Why is it so important?
That's easy - for many strategies, slippage will be the main reason it doesn't live up to the backtest.
The more you understand about slippage, the more you can prepare and design strategies that are resilient to it.
The first thing to consider is the different types of slippage.
Entry slippage - you got a worse price than your backtest on your entry order
Exit slippage - you got a worse price than your backtest on your exit order
Missed trades/partial fills - you expected to get X shares, but you only got some percent of X
Positive slippage - you get a better price than your backtest (my favorite kind lol), rare and mostly seen on target orders
All of these will wear away at your trading strategy (except the last one!).
It can be frustrating, but this is an unavoidable part of trading that you simply have to get used to.
Over the coming days, I'll address measuring slippage, how to include it (if at all) in a backtest, and the most important thing: what you can actually do about it.
More soon...
-Dave
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