Here’s a type of technical question relating to determing your trade position size that I came across on one of the forums I visit regularly.
When figuring Position Sizing per trade does it really matter enough to add maybe 5 pips “for slippage” onto the total pips there are between the entry and initial stop loss when figuring the Position Sizing as opposed to not adding any for slippage.
When determining the risk you’re taking on a new trade (and you absolutely should do that first, before you deside how big a position you take) you should include every element of potential loss or cost. That means not only the points or pips or ticks you are risking on the trade, but also the commission, interest (carry or margin) that you could end up having to pay, and any slippage that is to be expected.
To answer specifically about adding some amount for slippage, that depends on the market you trade. Very active electronic markets tend to have little to no slippage on order execution. Ones that are thinner will have larger slippage. Experience will tell you how much is normally. It doesn’t hurt, though, to factor in something above average. Better to be more conservative.
When you’re doing system testing you want to be as conservative as possible. Much better to assume higher costs and larger slippage and be pleasantly surprised to achieve better than expected profits. Just don’t go overboard because you might end up ruling out a perfectly good system.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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