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Best Futures Trading Strategies: 6 Ways to Minimize the Impact of Market Slippage

, , | March 8, 2024 | By

When it comes to the various hidden costs of futures trading, slippage is the undisputed king of the hill. When a market or stop-market order is filled at an inopportune moment, it can be a drain on both your trading account and patience. Aside from detailed plans governing position management and market entry and exit, some of the best futures trading strategies that traders design are aimed at helping reduce slippage.

A Strong Trading Infrastructure Is a Great Place to Start

While issues such as order routing, data bottlenecks, and exchange matching algorithms are out of a trader’s control, there are actions that you can take to directly reduce slippage. Active trading is often a game of milliseconds, and trading while armed with an efficient, robust infrastructure is the first step to effectively managing slippage.

Having orders consistently filled at a desirable price is a big part of sustaining profitability over the long-run. Here are several practices that will directly reduce slippage and ensure that your trading infrastructure is rock solid:

  • Wage war on latency: Trade-related latency is a driving force behind slippage expense. Ensuring that your computer is in peak operational condition, your internet connection is fast and reliable, and your software platform is functioning properly are three critical factors that you can easily manage.
  • Know your markets: The chances of experiencing slippage are increased dramatically according to the levels of liquidity present in the market. During times of exceptionally heavy or light participation, it can be a challenge to have orders filled efficiently. Understanding when markets are typically active or thin is a great way to avoid poor order execution.
  • Evaluate your broker: If your fills are consistently poor, the issue may be related to how your orders are being routed to the market. Making periodic evaluations of your brokerage service will help you monitor its competency and determine whether making a change is a wise move.

While these actions will help mitigate the negative influence of slippage, occasional bad fills are an unavoidable aspect of futures trading. The best futures trading strategies incorporate this reality, viewing slippage as a manageable part of doing business.

Streamline Your Trading Strategy

Losing money because of an undesirable fill is both frustrating and demoralizing. Trading futures successfully requires that you learn from mistakes and honestly evaluate performance. If poor trade executions and consistent slippage is destroying the profitability of even your best futures trading strategies, then it may be time to tweak your game plan.

Here are three ways to address slippage within the context of your existing methodology:

  • Modify order types: Implementing limit and stop-limit orders is a simple way of improving precision in the marketplace. Market, market-if-touched, and stop-market orders are filled at the “best available price.” This is often very different from a desirable price, so limit and stop limit orders can eliminate many unwanted discrepancies.
  • Limit trade frequency: Many strategies, including high frequency trading (HFT) or scalping, require the execution of a high number of trades that have smaller profit targets. Consistent slippage undermines the effectiveness of these approaches. Limiting the frequency of your trading and adopting a day, swing, or long-term approach to the markets will greatly reduce the impact of slippage on your bottom line.
  • Focus on liquidity: Trading in markets that regularly exhibit robust liquidity is a sure-fire way to have orders filled in an optimal fashion.

Even the best futures trading strategies occasionally fall prey to slippage. However, keeping performance at an acceptable level is possible by maintaining a strong infrastructure and adjusting your approach to the markets as needed.

The Best Futures Trading Strategies Account For Slippage

In an environment as dynamic as the futures markets, nothing is perfect. No matter how strong your strategies, technological infrastructure, and brokerage service are, a certain degree of slippage is unavoidable. Nonetheless, striving for maximum precision will save you money in the long-run. 

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