Slippage is the one of the most ignored factor by most of us while backtesting a trading system, but it’s impact is huge in Live Trading.
We have done a short study on ‘Impact of Slippage’ by comparing Live Trades and Backtest Trades.
Slippage depends on multiple factors like supply & demand, liquidity, time, network and location, trading system, trade value etc, so it is nearly impossible to account slippages accurately in percent or points in backtest.
For example, those entering at Breakout may experience higher slippage than those entering at pull back.
But we can track the slippages with our live trades for a sample period and can check it’s impact on our backtest results.
For this study, we have used one of our trading system (ofcourse a well known trading system).
Range Breakout (RB)
Logic Name: Range Breakout
Capital Used: 1000000
Leverage Applied: 5x
Period: 01-Nov-19 to 04-Sep-20
Trade Days: 211
Gross Profit: 1331769
Charges: 259452 (almost real with deviation in paise)
Net Profit: 1072317 (As per backtest)
The above Net Profit doesn’t include any slippages.
Though we have been trading this system for a long time, but for this study we deployed 10L in a separate account/server from 02-Sep-20 to 18-Sep-20 and enabled comprehensive logs in our software for post study.
You can download our Live Trades from the below link
Day Wise Slippages
The below table summaries our day wise slippages incurred.
Live vs Code Profit
The below summaries our Profit as per the code/program and real profits as per live Trades
From the live trades, we can see that our average slippage is 1879/day for this particular trading system.
Let’s see it’s impact on the backtest results
Total Expected Slippages = 1879 * 211 = 396469 (AvgSlip * TradeDays)
It’s ~ 29% on Gross Profit.
So if would have traded live during the backtested period, our Net profit would have been 674848 instead of 1072317 (backtest)
From the above, we can clearly see that the slippages have huge impact on our backtest in live trading.
So, one should have some justified method to calculate slippage and account it in your backtest results.
Do I Bother about Slippage?
If your system has high reward (say >= 5), then you won’t feel the impact of slippages.
If your slippages eats up more than 50% of your backtested profit, then you should.
Can I Avoid Slippage?
A big ‘NO’
But can be reduced
- Diversify your capital in to multiple stocks, segments, systems etc
- Have your Server close to Broker OMS
- Slice your order, and place some at Market and others with some buffer