Reducing Slippage on Timed Exits
By Dave Mabe
In yesterday's email, I mentioned several myths about exit slippage.
Now let's go over what you can actually do about it.
When your strategy enters a position, you typically need to get in "now" or close to it.
But think about when your timed exit fires - in most cases, it's not important to get out right at that moment.
Typically, somewhere around that time is fine.
Here's a concrete example. One of my strategies enters trades in the first half hour of the day.
There's a stop order, but no target order.
And in my backtest, if the stop order doesn't get hit, a timed exit gets me out before the close.
But if my backtest exits at 3:55pm ET, does it really matter if I exit at 3:50pm instead?
You can test this, but most likely it's not going to make that much of a difference.
Because of this flexibility, you can approach exits very differently from entries.
Instead of simply marketing out (the least graceful way to exit), you can exit over the course of several minutes.
Here are some things to try:
Split your order up and send smaller orders at regular intervals
Use a "pegged to midpoint" order and let it sit for several minutes before your actual timed exit
Use a hidden order with a conservative limit price and let it sit for several minutes
Each of these approaches should result in better fills than marketing out.
But here's the thing:
This isn't going to turn your strategy from a loser to a winner.
There are many easier ways to improve your strategy first.
So before you go down this path, you should prove to yourself that there are gains to be had by measuring your exit slippage over time.
Once you convince yourself it's worth the effort, you have more flexibility than you might think.
-Dave
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