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How slippage occurs in autofollowing strategies


The discrepancy in profitability between the author of the strategy and the user can sometimes exceed the commission of the service. In this case, we are talking about slippage. Let’s figure out how it occurs and what factors affect its size.

In fact, the discrepancy in profitability is inevitable when transactions are made in real “glasses” and not in the “kitchen”, since the service performs similar operations on customer accounts after the fact, i.e. after the author’s operation. Therefore, the prices of the author and investors will inevitably differ, and not always to the detriment of users. If, after the author’s operation, prices go in the direction opposite to his position, then clients will make transactions at a better price. If the position of the author is immediately in profit, then the discrepancy will not be in favor of clients.

Complaints from customers cause systematic slippage of two types: either it is tens (or even hundreds) of percent per annum, or it does not exceed 10% per annum, but taking into account the low profitability of the author (up to 20% per annum), the client’s profitability is even lower than bank deposit rates: 20% -6% (service commission) -10% = 4% per annum.

In the second case, an individual approach must be applied. If we are dealing with an active strategy (ITA greater than 1) that performs a large number of operations, then we need to look at its profitability and risks over a longer period.

First, a 20% return may be a temporary difficulty for the strategy, but historically this figure has been higher.

Secondly, even if the strategy gave out such profitability for a longer period, then you need to pay attention to its drawdowns, especially during periods of crisis. If its drawdowns and especially crisis periods did not exceed the same 20%, then this strategy should be considered as a “stabilizer” of the account and invest 50-70%% of the capital in it, and the remaining 30-50% in a strategy that gives high profitability “here and now”, i.e. diversify.

If such a slippage was formed on a passive strategy, then there can be only one reason for it: the author bought one instrument in large volume. This means that this slippage is just an anomaly due to one operation and will not happen again in the future. The decision to stay in such a strategy or to switch off depends on agreeing with the author’s view of the future of this particular asset.

It should be understood that passive strategies, where the author does not invest more than 20% of the account in one asset, have no slippage of more than 5% per annum on the auto-following service. And most often for such strategies it is no more than 1% per annum, provided that the client and the author have the same tariff plan. Therefore, we leave this case out of the question.

Of course, a slippage of tens of percent brings a special headache. There are two reasons why this happens: the author often makes transactions for a large share of the capital, and he has a lot of subscribers; The author trades on pre-placed orders, outside the current prices, and has a small (up to 0.5%) average profit in profitable trades.

Let’s consider the first case. Suppose there are 300 thousand rubles on the author’s account, he makes a transaction with a futures for a pair of rubles / dollars Si for 20 contracts, using no more than 200 thousand rubles for guarantee security (now the GO of this future is 15% of the face value, which today is about 62 thousand rubles ) or no more than 2/3 of their capital. At the same time, suppose that the author has 200 subscribers with the same 300 thousand rubles. everyone has it. Thus, after the author’s transaction, the service must perform an operation for 4000 contracts.

And now let’s look at the “glass” of the same futures at 12-13 pm, when it is “filled” enough. The Quik online trading program in standard settings gives us a “glass” of 50 orders in each direction. The difference between the best and worst bids in this “glass” is 50-60 points (rubles), i.e. bids are almost at every allowable price, but there are only 800-900 buy contracts and 1500-1700 sell contracts (there is such rather systematic “skew” of sellers in “glasses”). Thus, even with the most favorable scenarios for 1.5 thousand contracts, clients will have a slippage of 25 rubles from the best price, while the author of 20 contracts can make a deal within 2 rubles from the best price. And we get that with the most favorable outcomes, on average, clients will make a transaction 61.3 points worse than the author (=23*4000/1500). Or 0.1% of today’s face value. And this is provided that the best price has not changed. Of course, it can be better or worse after the author’s deal, but here we can just assume that the average for a large number of deals will be zero.

Thus, on each transaction of the author (opening a position – closing a position), clients will lose 0.2% compared to the author, at least. And we have not yet taken into account the situation of the first hour of trading and the evening session, where the situation in the “glasses” is much worse. And in general, we considered the most favorable slippage situation for a particular “glass” in the most liquid instrument of the Russian market. If there are 100 such transactions per year, then slippage will be 20% per annum, and if 1000 – already 200% per annum. And this is at least.

The second case of slippage is no longer associated with the volume in the operation, but with the trading method. Suppose the author, after the execution of the order, placed a stop loss (a conditional order for a reverse operation when the price changes not to the side of the position from the entry price) and a take profit (an order in the “glass” is better than the entry price) by 100 points. If, at the same time, we see the author’s profitability is high, then this means a large number of transactions, and most often after the execution of his order, the best price went towards the author’s position. Even if, after the execution of the author’s orders in “glasses” (entry and take profit), the slippage of clients is 10 points, then in each profitable transaction the client will have a result 20% worse, and in each unprofitable one 10% worse (we believe that with there is no stop loss slippage). And such strategies are profitable with a ratio of profitable to unprofitable 2:1. The total average slippage for ruble profit will be 16.7% worse in each transaction.

To earn 100 thousand rubles, the author needs to make 3000 transactions (100 rubles for three transactions = 100 * 2-100). In this case, the client will have at best 60 thousand (60 rubles \u003d 80 * 2-100 for three transactions). And if the author’s strategy shows a three-digit yield in %% per annum, then the slippage of clients will also be three-digit, and for four-digit yields, the slippage will reach four orders of magnitude.

And all this is on the site of the author’s superprofits. And for periods of zero profitability (for 1:1 trades), it will only get worse: for clients it will be negative, since in each of the two operations, although with one stop loss, clients will have a minus.

And all this without taking into account the volume of subscribers, since with a large volume, you need to add a minus from the analysis of the first case. And if you add it, then even with a three-digit profit from the author, customers in general will only have minuses.

So do not blame the service for slippage – it “plays as best it can.” And liquidity in “glasses” does not depend on it. And the execution of transactions of auto-investigators on the stock exchange is the “alpha and omega” of honest, undrawn auto-tracking.

To avoid large slippage, users are advised to carefully look at the volume of the author’s operations in% of the account and the average size of the operation (the service gives this information to all subscribers). If the first is big and the second is small, then you should not invest more than 50% of the capital in such strategies with hundreds of subscribers. If the author has a small average trade size, then pay attention to whether the author buys more often on intraday falls and sells more often on intraday growth. If he does so, then, alas, you will not repeat his profitability.

Strategy writers are advised not to trade by buying intraday dips and selling intraday rallies. If there are many subscribers to your strategy, then spread either volumes in operations by 0.2-0.5%% of the price of the previous one, or operations by time for 5 or more minutes, without using more than 10% of the account in one operation.

My profession is a journalist, but my hobby for 8 years has been studying Forex investing and trading. During this time, I managed to gain extensive experience in investing and trading cryptocurrencies and double my capital in the Forex market. To be the author of this magazine, the site owners invited me to participate in one of the 2020 trading webinars, and I will try to reveal the most relevant crypto market news for you.

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