This article on Futures Trading Slippage is the opinion of Optimus Futures.
Sometimes the difference between making and losing money in the futures market has nothing to do with the strategy or the market you’re trading.
In fact, you can be in the right trade at the right time and still lose money if you get this one thing wrong.
If you haven’t guessed by now, we’re referring to trade execution. And one of the biggest culprits of losing money is slippage.
What is Futures Trading Slippage
Futures trading slippage is a term used to explain the difference between the expected “fill” price vs. the actual “fill” price. In other words, it’s the difference between what you expected to pay/sell vs. what you actually paid/sold.
For example, imagine a bullish jobs number was just released. Believing it would push stocks higher, you buy E-mini S&P 500 futures. The price you see on the screen is 4100, so you put in a buy order at the market.
You check your filled orders and see that instead of getting filled at 4100, it’s filled at 4105, five points higher than expected.
Negative slippage can happen while trading futures and commodity options. And it can be absolutely devastating to a trader’s PnL. However, there are steps you can take to avoid slippage, which we’ll share with you shortly.
Why Futures Trading Slippage Happens
Slippage typically occurs during three scenarios.
Every commodity or futures contract is catalyst-driven.
For example, on Wednesday at [10:30] AM ET, the Energy Information Administration (EIA) provides weekly information on petroleum inventories in the U.S.
The results from the EIA report have the potential to move crude oil, gasoline, and distillate futures products. The anticipation and the reaction to the news may cause the bid and ask prices to widen. And that’s natural when there is market uncertainty.
Placing “a market order” while there is a breaking news catalyst is often a risky play because of all the potential slippage involved.
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During scheduled announcements like the EIA Petroleum Status Report, expect volatility to be enhanced shortly before and after the release. If the numbers are similar to the consensus, you can expect the market to normalize and the bid/ask spreads to tighten.
The S&P 500 experienced its worst April in 52 years in 2022. The E-Mini S&P 500 futures would sometimes move 2-4% intraday, which is historically high volatility.
Now, if you were placing market orders during these volatile sessions, then it’s likely you’d encounter some slippage.
If you’re a scalper, slippage can potentially ruin your trading plan if you get a bad fill. And if you are someone who trades multiple contracts then slippage can be costly.
While T-Bonds, T-Bills, E-Mini S&P 500, and Crude Oil are among the most actively traded futures contracts, there are others you have to be careful with.
For example, let’s say you wanted to trade Palladium futures (PA) on a Sunday night. Unless there is a catalyst, you can expect the bid-ask spread to be wide.
Let’s say the last price for palladium is 1995, but the bid is 1995 and the ask is 2003. Because Palladium futures aren’t typically liquid on Sunday night, the market will be thin, and the spread between the bid and ask will be wide.
Placing a market order in a futures contract that isn’t very liquid is an uphill battle.
For example, let’s say you market buy palladium at 2003. And for whatever reason, you no longer like the trade, and want to sell out of it. Because there isn’t much liquidity, chances of getting filled at your desired price are unlikely. Instead, you are more likely to hit the bid if you want out.
How to Avoid Futures Trading Slippage When Entering the Market
There are two order types you must avoid if slippage is a concern.
Market Order: This is an order to buy/sell regardless of the price. In most circumstances, a market order is okay. However, you want to avoid it if there is a catalyst, the market you’re trading is experiencing a spike in volatility, or if it’s an illiquid market.
An easy way to avoid slippage is by setting limit orders. A limit order allows you to buy or sell at a specified price. If the underlying futures price never reaches that specified price, the order will not be executed.
Note: While market orders guarantee you a fill, a limit order does not.
A “stop-loss” order is one of the most important tools for any trader. It essentially functions as a market order that gets triggered when the price hits your predefined level.
New traders should use stop-losses as a method for limiting their losses.
Some experienced traders use stop-loss limits to prevent excessive slippage. However, these orders may not be executed if the market gets slightly above or below the specified limit price, depending on whether the trader is long or short. This could have a material impact on the performance of the account.
Disclaimer: The placement of contingent orders, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such an order
Dealing With Futures Trading Slippage
Slippage can be avoided by futures traders by setting limit orders. But if you’re trading futures, slippage is something you may have to live with.
- Determine the amount of slippage you may encounter when placing market orders. For example, if you trade Micro E-Mini S&P, it may have 1-2 ticks of slippage on market orders, while less liquid markets may have much higher slippage.
- Consider the impact of slippage and commissions on your strategy. Like most professional traders who made it in the industry, they considered such costs and found a viable strategy to accommodate them.
- Liquid markets (Emini S&P, Emini NASDAQ, etc.) experience large amounts of trading activity and healthy price competition. They are favorites among active traders because there is great transparency and lots of liquidity that translate into tighter bid-ask spreads which may limit slippage.
Futures trading slippage is not something you should take lightly. It can be the difference between making or losing money in some cases. Luckily, by changing your order types you can avoid slippage in the futures market easily.
However, when trading futures options, it is something you should take into account when calculating your profit targets and break-even levels.
Optimus Futures works with clients to provide fast, accurate market data while executing orders through our online platform or flagship Optimus Flow desktop software.
Traders gain access to a wide variety of instruments including micro futures. Plus, Optimus offers competitive, transparent trading commissions.
Open a free demo account today and begin exploring all the features Optimus has to offer.
There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.