My Stop Limit Order Settings and Pleasant Surprise

Yesterday, I shared the trade I took years ago when I learned just how much slippage can happen in the real world.

I furiously added support for stop-limit order types to my entry order in my trading robot software.

I knew this was the right thing to do for my strategy as I continued to increase my size as it performed well.

But I was also worried.

If I switched to a stop-limit order, I would definitely miss trades that I otherwise would have filled (since I was adding a limit to the stop order).

If I placed the limit price far away, I would get more fills, but I would be guaranteed to have more entry slippage.

If I placed the limit price really close, I would eliminate the entry slippage, but at the cost of more missed trades.

And think about it: the trades I would be missing weren't just "average" trades in the system - they're far more likely to be the profitable ones.

So how did I decide what level to use for the limit price?

I decided to use a percentage of the distance from my entry price to my stop loss price, based on my calculation for how much slippage is too much for this trading strategy.

I had settled on 30% slippage being my threshold for total slippage - anything beyond that would make me less confident in it.

So for the limit price, I used 24%. I knew I might need to change this value, so I made this a numeric field I could adjust without recompiling my trading robot.

Here's the math for a hypothetical trade.

Let's say the setup was to enter short if the price reached 49.00 (from above), and my stop loss was 50.00.

The stop distance is: $50.00 - $49.00 = $1.00

And using my value of 24%: $1.00 * 0.24 = $0.24.

So my entry order was a stop limit order with a stop price of $49.00 and a limit price of $49.00 - $0.24 = $48.76.

I started using those settings for my orders, fearing a barrage of missed trades and frustration.

But what I found really surprised me - in a good way.

Yes, there were plenty of fast-moving trades where I wouldn't get a fill - initially.

What I didn't realize before this was just how many of these volatile movers that skip over my order eventually come back to get filled a little later.

I could leave the entry order active for some time, and I would get filled at a much higher rate than I initially feared.

A pleasant surprise! (Most surprises in trading are not of the pleasant variety.)

-Dave

P.S. Afraid to size up because you don’t trust your edge? Build confidence to trade your strategy with bigger size with MabeKit.

"Just a note to say MabeKit is sooooo good! It's going to make me a lot of money!" - Leo M.