The Secret to Better Fills, Less Slippage, and Fewer Stop Outs

[TimRacette 11]

Most traders experience a significant amount of slippage on their positions. Most traders also fail. There are two things you must know to get better fills, less slippage and fewer stop outs.

 

The first thing which leads to better fills is knowing when to use the different order types. When entering a position you have the ability to place a market order or a limit order. Which is best.

Market Orders

These orders are great for exits, but dangerous for entries. This is because a market order is an order to buy or sell at the market, whatever that current price may be. We all know that the markets move incredibly fast so when you place a market order or click the join bid/ask you are essentially throwing your hands up in the air saying “I don’t care where I get filled.”

 

Is there a better option?

 

Limit Orders

Yes. The way to get better fills is to use an order time foreign to most traders, limit orders. This order type ensures that you will get the best fill possible because a limit order is instruction to buy or sell at the price you select OR BETTER. This means you cannot get filled for anything worse than where you place your order.

When to NOT Use Limit Orders

There is one instance that you would not want to use a limit order, when placing stops. A stop order is saying, “When price touches this level I want to close out my position at the market.” For most order execution platforms a stop order is by default a market order.

 

If you were to use a stop limit order and price were to quickly move through your stop price, you would remain stuck in the position. Think about it. That limit order is saying, “I want to get out at this price or better” so if you’re long with a stop below you and the market quickly moves through your stop limit order, the order will stay active and not fill you, very dangerous.

Tips for Breakout Traders

If you are the type of trader who likes trading breakouts, instead of waiting for price to breakout and then clicking the market button consider using buy stops and sell stops. Placing a stop just above the break out point where you would like to enter will push your order into the market at the point that the market breaks your level.

 

While this order is a market order, placing it well in advance will help reduce slippage because most platforms use a FIFO, (first in, first out) method. Meaning if you want to buy above highs and place your order sooner than the next trader, you will be filled first. If you wait for that breakout and then hit the market button you will be last in line.

 

Example Trades

 

Tips for Traders Using Retracements

This is where the power of limit orders really shines. If you’re the type of trader who likes to buy or sell when price has retraced of its highs or lows, using a limit order will ensure that you will get filled at your price or better.

 

Waiting for price to retrace can help reduce the number of stop outs you take. The reason being, you are not impulsively jumping in at highs, you are waiting for that pullback in the larger trend and as that counter trend trade loses steam, you enter in anticipation that the market will resume in the current direction.

 

The Downside of Limit Orders

One con about using limit orders is that if price does not go beyond your order you will not be filled. This however, can be looked at as a good or bad thing.

 

Limit orders ensure you get the best possible price, and I’d rather trade in this way missing a few trades, than taking stop out after stop out, by impulsively clicking the market order.

[MightyMouse 12]

I found entering with limit orders very frustrating. A lot of times you get no fill or it misses you by a tick or it fills you and it runs right through you. At this point the trades that I expect to make the most money with, I enter with stop orders. Entering with stop orders alleviates the need to call the turn.

 

To use stop entries you need to be mature as a trader since, by design, you are not getting in at the lowest (highest) tick possible for a long (short) and there are a lot of traders who will be bothered by getting in many ticks higher than they could have. The trick is to get into trades that have great potential so that the ticks that you missed in the beginning are chump change, but you do need to know how to get a good read on the direction of the market you are trading.

 

I suppose the best of both worlds is to be able to call the turn and know the direction, but I resign to the fact that I am a turn calling disabled trader. In fact, I enjoy taking money from those traders who are unable to call the turn.

[horace 10]

 

The trick is to get into trades that have great potential so that the ticks that you missed in the beginning are chump change, but you do need to know how to get a good read on the direction of the market you are trading.

 

 

Excellent post MM.

What technique do you use to spot a potentially good trade from a useless trade.

 

cheers

[TheNegotiator 13]

Everyone, not to be churlish about the topic, but seriously if you aren't aware of different order types availble and what they do, just explore your platform and try them out on the simulator.

 

This is really really basic stuff- not a secret.

 

If you want great fills, do your homework, trade a liquid market and sit in an office right next to the exchange!

[joshdance 10]

One con about using limit orders is that if price does not go beyond your order you will not be filled. This however, can be looked at as a good or bad thing.

 

I'm not trying to be super picky, but for anyone reading this who doesn't know, this is not an accurate statement. Anyone who doesn't understand this should simply understand how queues work, and how a transaction takes place. Not saying you don't know Tim, but it is certainly not accurate as stated.

 

Also, if I may say, it's a bit ballsy to title this post "The Secret to ..." -- a better title would be "Basics of order types," i.e., stuff one should know about before ever taking a trade, just like learning which pedal is the brake and the accelerator before driving a car.

[TheNegotiator 13]

You're not being picky at all Josh. It's how the market does work and it is important.

[MightyMouse 12]

Excellent post MM.

What technique do you use to spot a potentially good trade from a useless trade.

 

cheers

 

You never know if its a good trade or a useless trade until after you make an attempt. Very simply, I look for HH HL or LL LH.

 

A good trade turns positive fast and a useless trade turns negative fast. I cut quickly when my trade turns negative. I pound as hard as I can when I have a winner.

[TimRacette 11]

Very true Josh, perhaps that wording wasn't best suited. At times I am filled when price touches my limit, but it's more common for price to need to trade through. Point taken though, thanks.

[Qiman 10]

Everyone, not to be churlish about the topic, but seriously if you aren't aware of different order types availble and what they do, just explore your platform and try them out on the simulator.

 

This is really really basic stuff- not a secret.

 

If you want great fills, do your homework, trade a liquid market and sit in an office right next to the exchange!

 

Order types is just about the most basic of all knowledge in trading.

 

In most fields that I have explored, any time I see "The Secrets of ..." in the title of an article or book, I acknowledge this may just be marketing strategy, in some cases it is just a title to grab the reader's attention, and that is ok if it works. That looks to be the case here with Tim. This thread is getting reads and posts, so the title was effective in its own way!

 

Of course, in some venues like martial arts and trading, it can instead be an attempt to draw in those who are desperately looking for some answers. And all of us have seen plenty of that in magazines and books.

 

I am not too sure if there are many secrets in trading or in most other fields. Usually the solution to problems, and "the Secret," is exceptional Mastery of the fundamentals, but is that ever a difficult process, and something which few of us will never achieve in any field.

[phantom 16]

A good trade turns positive fast and a useless trade turns negative fast. I cut quickly when my trade turns negative. I pound as hard as I can when I have a winner.

 

Well said.

 

This, my friends, is the only "holy grail" there is in trading.

 

 

Luv,

Phantom

[TimRacette 11]

I'd actually have to agree with you Qiman. This was the first post I put up where I used "secret" in the title and regret doing that now. All the other things I've shared have been more direct. Thought I would mix things up a bit, but I'll stick with more direct headlines from now on. I appreciate you reading the post though. Happy Thanksgiving.

[BearBullTrading 10]

The Downside of Limit Orders

One con about using limit orders is that if price does not go beyond your order you will not be filled. This however, can be looked at as a good or bad thing.

 

Limit orders ensure you get the best possible price, and I’d rather trade in this way missing a few trades, than taking stop out after stop out, by impulsively clicking the market order.

 

In my trading the majority of my orders have always been Market and Buy/Sell Stop Orders. If there's a reason to be in, I want in.If there's a reason to be out, I want out.

I don't like to rely on someone else (limit orders) to do that for me.

 

Limit Orders guarantee you will always be in your losing trades but not the winners. Yes, you get a higher/lower price IF filled and market reverses, but is that "better" than missing some winning trades completely....maybe,maybe not

 

Its not the order type that causes Stop Out after Stop Out...Its likely the act of "impulsively clicking"...I'm pretty sure I could generate a string of Stop Outs by "impulsively clicking" Limit Orders... Click when there's a reason to.

 

Fewer stop outs may/may not be beneficial to the overall profit, equity curve, drawdowns etc . It has to be balanced with the missed trades.

 

Having said that...Just to show there are no absolutes in trading and decisions are dynamic, I have recently started to increase the No.of limit orders I use in certain markets/situations. Whether this "phase" continues or not we'll see...

 

The "best" order type can depend on style & personality..ie. I generally like to "go with" as opposed to trying to pick the reversal point.

With limits there may be a temptation for some traders to fiddle with/cancel etc as price nears and trades at a level hoping for just "a little bit better"..the result is invariably missing it completely !

 

The Bank I traded for had stats of the order types each trader used because Brokerage fees may be type dependent...eg. A limit Order provides liquidity, A Market order extracts liquidity from the market so a trading platform/broker may charge less fee for "providing liquidity".

 

I invariably used Market Orders, the guy next to me invariably used Limits - No right, No wrong

 

Trade Well

[Phil-n-Texas 10]

great post Tim... and while it's true that anyone that's serious about trading should understand this as a one of the 101 basics, for some it may be "missed" or dismissed as important.

 

as for me order type / trade plans are an essential component of my methodology... my risk management is all tied into scaling in and out of trades, etc.

 

i might just throw in a little tidbit that i try to follow when using limit orders for entries using the ES as an example... I always try to place my limit order to the nearest .25 or .75 tick as price tends to reach the even numbers... this one little thing helped improve my fills significantly. actually i also do that on my exit targets as well... 25s and 75s...

[TimRacette 11]

Ya Phil, I will round in the the direction of my trade then add a tick when I am using limit orders.

[cw30000 10]

It also depends what you are trading. If you trade the ES, then you will not get slippage on market order.

 

However, if you are trading the TF or CL, then expect 1 or 2 ticks of slippage.

[joshdance 10]

:helloooo:

It also depends what you are trading. If you trade the ES, then you will not get slippage on market order.

 

However, if you are trading the TF or CL, then expect 1 or 2 ticks of slippage.

 

Depends-- I usually don't get slippage on ES but sometimes get 1 or even 2 ticks.

CL I would frequently get 1 or 2, and in some cases 4 or 5.

[johnnyh 10]

Holy s@&t!!!! I rarely comment, but seriously....... Look Traders, we are on this site because we want to be successful traders. We know what f@&$ing order types are out there. And the crap vendor this e mini dip shoot is pushing, doesn't offer stop limit orders with a pay up limit? Come on that's garbage!! This is my livelihood, if I set a stop loss limit order, I need to know that if I'm at the store, or grocery shopping, that my order will get filled. Most REAL traders use a vendor that offers a stop limit order that has a pay up or pay down setting if it trades through your price so as not to leave you hanging. This guy needs to go to another photo sitting or something, and stop treating people on this site like they are morons.

[Predictor 11]

I'm somewhat doubting the bolded line.. is this true for ES? I thought only limit orders were held at the exchange. This just doesn't make sense to me unless you mean that the platform will execute the market order faster then one can manually.

 

Tips for Breakout Traders

If you are the type of trader who likes trading breakouts, instead of waiting for price to breakout and then clicking the market button consider using buy stops and sell stops. Placing a stop just above the break out point where you would like to enter will push your order into the market at the point that the market breaks your level.

 

While this order is a market order, placing it well in advance will help reduce slippage because most platforms use a FIFO, (first in, first out) method. Meaning if you want to buy above highs and place your order sooner than the next trader, you will be filled first. If you wait for that breakout and then hit the market button you will be last in line.

[TimRacette 11]

johnnyh, didn't mean to offend anyone, sorry man. Predictor, FIFO does occur, but it's not as big of a deal with small size.

[joshdance 10]

I'm somewhat doubting the bolded line.. is this true for ES? I thought only limit orders were held at the exchange. This just doesn't make sense to me unless you mean that the platform will execute the market order faster then one can manually.

 

Stop orders are held at the exchange, most any in the world I would think anyway. What good would a "protective stop" be if it were not held at the exchange?

 

Here are the order types that CME uses, as one example:

http://www.cmegroup.com/globex/files/GlobexRefGd.pdf

[TimRacette 11]

That's not always the case and is an important topic when choosing futures broker. Some brokers rest your orders on the exchange servers, other brokers rest them on their servers, even more, some orders are held on your own computer only.

 

There is latency (or lag) between the order being filled, thus the result for slippage. I realize the title is corny, and a lot of people think the topic is to basic, but it's an area often overlooked. If you receive slippage often on markets like the Emini S&P or Euro, I'd talk with your broker.

[joshdance 10]

That's not always the case and is an important topic when choosing futures broker. Some brokers rest your orders on the exchange servers, other brokers rest them on their servers, even more, some orders are held on your own computer only.

 

Can you name a broker who does not put the order at the exchange? Not doubting that it's true, just would like to know any.

 

As for locally held orders, a negative stop limit order, for example, is simulated on my PC, though a regular stop limit goes to CME. OCO orders are simulated locally for me as well, but both orders are actually at the exchange, and only the cancellation of the order not executed is done locally. So yes, some may be done locally, but a regular stop order is always non-local, otherwise, it would not serve its purpose.

[mike21 10]

Can you name a broker who does not put the order at the exchange? Not doubting that it's true, just would like to know any.

 

Limit orders are held at the exchange, stop orders are not. IB holds stop orders on their server. With IB the stop orders are time stamped so they are filled in order when sent to the exchange.

 

With some brokers, Lightspeed for example, stop orders are held on your computer. Personally, I would avoid this type of broker.

[joshdance 10]

Limit orders are held at the exchange, stop orders are not. IB holds stop orders on their server. With IB the stop orders are time stamped so they are filled in order when sent to the exchange.

 

With some brokers, Lightspeed for example, stop orders are held on your computer. Personally, I would avoid this type of broker.

 

OK let's get clear here and get the facts straight.

 

The answer to where a stop order (or "stop market order") resides depends on two things: the broker and the exchange.

 

In my case, my stop order does reside at the CME exchange. I can verify this by looking at the order info in my platform, and verify that it is at the exchange. If you need some proof of that let me know and I will send a screen shot. Also, I called my broker (Velocity) to verify and yes, the orders are at CME, not the broker servers.

 

Some exchanges may not even allow stop market orders (theoretically). If you wanted this functionality then, the broker could offer to simulate a stop market order for you. A more common scenario is an exchange that does not offer OCO orders (CME is one example). In this case, either the broker could simulate the order (such as TD ameritrade), or more commonly, the local PC simulates the order. However, the Eurex exchange natively supports OCO ( Eurex - One-Cancels-the-Other (OCO) Order ). So, hopefully it's clear that if the order type is not supported by the exchange, it must be simulated by the broker, or locally (or by some piece of software between you and the broker).

 

CME Globex has no notion of a true "stop market" order. Instead, they have what they call a "stop with protection" order ( http://www.cmegroup.com/globex/files/GlobexRefGd.pdf ). It's much safer, and ensures that you do not get completely screwed due to a catastrophic event. When you enter a stop order with CME globex, they convert it into a Stop Limit order. The limit price will be the trigger price for the order plus half of what's called the "no bust range" ( Globex No Bust Ranges ) or "non reviewable range" ( TRADE CANCELLATIONS AND PRICE ADJUSTMENTS ). For ES, for example, it's 6 points, thus, the trade may be cancelled if you are slipped 3 ES points. For CL, 50% of the range is 50 ticks. And so on. Here is more information on this process: Question regarding how NT handles stop market orders on Globex - NinjaTrader Support Forum

 

So, it appears that IB simulates stop orders ( http://www.interactivebrokers.com/en/trading/usFuturesStopOrder.php ) and holds the orders on their servers. Why they do this, I do not know. At some point when the order is given to CME, it will be assigned as a stop limit with a 50% no bust range limit anyway, so I don't see the point in simulating the order on their server.

 

If anyone uses NT and wants to see based on the broker where their order resides, here's a document:

http://www.ninjatrader.com/support/forum/showthread.php?t=5349

 

I hope this clarifies things.

[BlueHorseshoe 10]

Some brokers rest your orders on the exchange servers, other brokers rest them on their servers, even more, some orders are held on your own computer only.

 

. . . And some brokers will give you the option to chose which of the above you wish to do. It's therefore important to know what 'default' setting of your platform is in this respect, and how to change it should you wish.