The Nightmare Trade When I Learned About Slippage

I knew what slippage was, but it didn't dawn on me how bad it could be.

I had been trading my strategy for 3 or 4 years with no real slippage issues.

I had automated my trades, so mistakes and fat-fingering orders were a thing of the past.

The strategy involves looking for stocks gapping down, then watching for a pattern in the first 30 minutes.

When the pattern materializes, the trade setup is defined - a short trade when the price breaks the low of the pattern with a stop at the top of the pattern range.

So when the setup is active, the trade may or may not trigger.

Up until this point, I was using a sell stop order to enter the trade.

The automation had worked well for years - and, in fact, it worked "perfectly" for this trade as well.

This was full automation, so I would simply watch the orders go in and the trades play out.

On this particular day, everything was running smoothly.

Then, I hear the ding for a trade (as normal) and glance at TWS to see the trade.

And I couldn't believe what I saw.

I had been risking X dollars per trade, but when I looked at TWS, I had already booked a loss of 10X, not 2 seconds into the trade.

What the heck!?!?

In one instant, it became crystal clear why you would want to use a stop limit order instead of a stop order.

Here's what happened.

The stop order triggered on what I thought was a pretty thick stock.

But I didn't get a fill until the price dropped 10X my original stop distance.

And then it immediately reversed and hit my stop loss.

In less than a second.

You can guess what happened next.

It cratered down beyond my original entry - without me in it.

So that's why you'd want to use a stop limit order, I thought.

And I dropped everything I was working on to add support for stop limit entry orders in the robot I was using at the time.

With a stop limit order, I would have closed this trade with a profit instead of a 10X loss.

The solution seemed so obvious after the trade - and I was kicking myself for not realizing this before.

Sometimes you have to experience things to truly learn the lessons.

Tomorrow, I'll share the settings I use for the stop limit orders and the positive surprise I never would have guessed after implementing them.

-Dave

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