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Advanced Techniques for Futures Trading: How Slippage Can Compromise a Strong Strategy

January 8, 2019 by Daniels Trading| Tips & Strategies

No matter how seasoned or talented a futures trader may be, chances are slippage will have been a formidable adversary at one time or another. To minimize the impact of slippage, traders use two common strategies ― streamlining technological infrastructure and developing advanced trading strategies ― but are there other ways to win the war against slippage?

The answer to that question is a resounding “Yes!” You can boost your trade-related efficiency and promote a “slippage-resistant” approach to the futures markets by addressing two key issues:

  • Understanding how efficiency impacts your trading strategy
  • Exploring broker-side options for enhancing efficiency

By quantifying how less-than-optimal order execution impacts your game plan, and identifying areas where your broker may be able to help, slippage can become a tolerable evil.

Understand Your Trading Strategy

A comprehensive trading plan is a beautiful thing. It provides the framework for addressing risk, trade selection, and money management as the market evolves. However, no matter how strong a strategy appears to be on paper, slippage can undermine your ability to generate consistent profits in the live market. Here are several reasons why this occurs:

  • Liquidity and volatility: A product’s depth-of-market and activity levels are always changing according to prevailing conditions. Trading during periods of limited liquidity or extreme volatility enhances the chance of sustaining loss due to slippage.
  • Inefficient order types: Using market or stop-market orders for market entry and exit can be costly. Being filled at the “best available price” is often very different from the ideal price.
  • Unrealistic profit matrix: Small profit targets and high trade frequencies magnify the impact of slippage on a strategy’s bottom line. Unless a trader takes measures to maximize efficiency, this type of strategy is destined to underperform.
  • X-factors: Every market, exchange, and trading infrastructure is unique. Unseen issues such as data lag, inefficient order routing, and server performance can all produce undue system latency, enhancing slippage.

Market liquidity, risk vs. reward, and order type are three primary areas where slippage compromises many strong, advanced trading strategies. Nonetheless, by exercising a little due diligence and taking advantage of the services of a competent broker, you can achieve optimal order execution.

Broker-Side Remedies

Perhaps the greatest challenge regarding slippage is that many of its drivers are not within a trader’s control. Although advanced trading strategies can help minimize a perceived downside, securing the services of a reputable brokerage is also very important.

Want to learn more about E-mini trading basics? Read our guide, Introduction to  E-Mini Stock Index Futures >>

Futures brokers come in all shapes and sizes, from full-service to deep discount. The most suitable selection depends on your available resources and trade-related goals. If you’re planning on attacking the futures market with a strategy that’s especially sensitive to slippage cost, then working with the right broker is a must. Here are a few services that are de facto broker-side remedies:

  • Direct market access (DMA): DMA greatly enhances fill quality and trade execution. Under DMA, your orders go directly to the exchange without first being routed through an intermediary.
  • Order hosting: Often times, orders are held locally on the trader’s PC before being filled at market. This is known as client-side hosting. Server-side is the opposite ― orders rest at the exchange while awaiting execution.
  • Automation: One way to greatly reduce latency and slippage is to automate your trading strategies. Automation incorporates trade selection, order placement, and trade management into one automatic function. In addition, automated strategies are often utilized via broker-furnished co-located servers, further increasing precision.
  • Robust trading software: Advanced order types, bracket orders, and low latency charting software are strong ways to improve trade-related efficiency. Having a broker that supports the ideal platform for the execution of your advanced trading strategies is a must.

In the modern futures market, traders have access to a vast array of brokerage options. Features such as server-side order hosting, automation, and DMA are a few common ways a broker can help enhance your trading efficiency.

Putting Your Advanced Trading Strategies to Work

While it’s true that the cost of bad fills can be substantial if left unchecked, there’s good news: Slippage is manageable. By using adequate technology and a competent broker, you can dramatically reduce poor trade execution.

For more information on mitigating slippage from the broker-side, check out a free consultation with a futures pro at Daniels Trading.

Want to learn more about E-mini trading basics? Read our guide, Introduction to  E-Mini Stock Index Futures>>

Filed Under: Tips & Strategies

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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