As an example, the computer reported a gain of +$1,365.81 for a day trading system after accounting for $17.26 in commissions, but a hypothetical client trading the system earned just $1,249.29 on the trade. What happened? Where did that extra $116.52 go?
It’s called slippage, and it is the difference between between where the computer signaled the entry and exit for a trade and where actual clients, with actual money, entered and exited the market using the computer’s signals. But shouldn’t the computer reported profit and the profit in the actual client accounts be one and the same, you ask? That would be nice, but no, there will always be a difference between the prices where the computer generates the signals and the prices actual clients using actual money get.
This can seem like an alarming problem at first, as even small differences of $20 to $30 per trade can add up to investor’s actual results being $1000 – $2000 less than the computer has generated over the course of a year.
But the good news is slippage can be fully accounted for in backtesting, and fully measured in real-time. And all of the hypothetical testing and reports on the iSystems platform include an allowance for slippage in order to give investors as realistic a picture as possible for what sort of performance they can expect moving forward. Getting a handle on how much slippage to expect in each market a trading system includes in it portfolios is paramount to achieving success with these systems. If too little slippage was used in the testing, a system may be operating exactly as it was designed to operate, but at the same time grossly under performing an investor’s expectations.
Too many developers take the easy way out, unfortunately; by assigning a single number for slippage to each market. This number generally includes commission costs as well, and ranges from $10 per trade to $50 per trade, meaning many are allotting just $5 to $10 for each buy and sell for slippage. Is this enough? Are these slippage estimates realistic? The answers to these questions depend on many factors, but in first understanding why slippage exists, we can start to make educated decisions on how much slippage to account for in our backtesting.
On the iSystems platform, there are two separate ways to evaluate slippage, depending on if the system is active or only displaying backtested and forward tested results. If the system is not trading live, the slippage is a representation of the rolling 50 day average of slippage across all systems trading that market on the date being tested. While that may not sound all that impressive at first glance, it is a quantum leap ahead of assigning a fixed slippage amount in testing. This is a sort of big data approach to assigning slippage in testing, and uses the actual observed slippage across other systems trading the market you wish to test on. What’s more – it uses a 50 day average of the slippage, so the slippage is dynamic – increasing during periods of high market volatility and expanded bid/ask spreads, and declining during opposite periods of low volatility. It is also dynamic per market, meaning there’s no ‘one size fits all’ here. The Dax will rightly get a slippage number much higher than the Euro Stoxx, and so forth.
This dynamic slippage number is applied per market, per trade date, on any backtested performance – resulting in the amount the computer ‘thinks’ it made (or lose) on any certain date being decreased by the amount of slippage for that market on that day.
All of this can be seen in the ‘trade log’ and ‘session log’ for any algorithm on the iSystems platform, listing the so-called ‘hypo fill’ (where the computer thinks it got filled) and the platform fill, which is the slippage adjusted price. Sound too complicated – luckily, this is all done by the platform automatically – with the slippage amount already built into the equity curve, the P/L, all returns, and drawdowns.
IMPORTANT RISK DISCLOSURE
You should fully understand the risks associated with trading futures, options on futures, commodity trading systems and retail off-exchange foreign currency transactions (“Forex”) before making any trades. Trading futures, options on futures, Forex and commodity trading systems involves substantial risk of loss and is not suitable for all investors. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more than your initial investment. Opinions, market data, and recommendations are subject to change without notice. Past performance is not necessarily indicative of future results.
The returns for trading systems listed throughout this website are hypothetical in that they represent returns in a model account. The model account rises or falls by the average single contract profit and loss achieved by clients trading actual money pursuant to the listed system’s trading signals on the appropriate dates (client fills), or if no actual client profit or loss available – by the hypothetical single contract profit and loss of trades generated by the system’s trading signals on that day in real time (real-time) less slippage, or if no real time profit or loss available – by the hypothetical single contract profit and loss of trades generated by running the system logic backwards on backadjusted data (backadjusted).
The hypothetical model account begins with the initial capital level listed, and is reset to that amount each month. The percentage returns reflect inclusion of commissions, fees, slippage, and the cost of the system. The monthly cost of the system is subtracted from the net profit/loss prior to calculating the percentage return.
If and when a trading system has an open trade, the returns are marked to market on a daily basis, using the backadjusted data available on the day the computer backtest was performed for backtested trades, and the closing price of the then front month contract for real time and client fill trades. For a trade which spans months, therefore, the gain or loss for the month ending with an open trade is the marked to market gain or loss (the month end price minus the entry price, and vice versa for short trades).
The actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market behavior, the duration and extent of investor’s participation (whether or not all signals are taken) in the specified system and money management techniques. Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this website.
Please read carefully the CFTC required disclaimer regarding hypothetical results below. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.
The information contained in the reports within this site is provided with the objective of “standarizing” trading systems account performance and is intended for informational purposes only. It should not be viewed as a solicitation for the referenced system or vendor. While the information and statistics within this website are believed to be complete and accurate, we cannot guarantee their completeness or accuracy. As past performance does not guarantee future results, these results may have no bearing on, and may not be indicative of, any individual returns realized through participation in this or any other investment.