The impact of slippage on performance
While our current calculations consider utilization versus performance, capping TVL for high performance is necessary because larger position sizing can have a detrimental impact on profits.
Let's assume a 30% win rate, a 4:1 Risk-to-Reward ratio (for every 1% risked, we hope to make a 4% return), with an overall 4% profit and 1% loss, including approximately 0.22% extra slippage (as reported in our overall performance reports). This means out of 100 trades, only 30 are profitable, yielding a 4% profit, while 70 trades hit our Stop Loss at 1%, with both suffering from slippage."
Let's calculate how slippage can affect performance based on the metrics we provided in the last paragraph.
Assumptions:
Win rate: 30%
Risk-to-Reward ratio: 4:1 (for every 1% risked, you aim to make 4%)
Overall profit per trade: 4%
Loss per losing trade: 1%
Extra slippage per trade: 0.22%
Now, we can calculate the expected performance over 100 trades with and without slippage.
1. Without Slippage:
Profitable Trades (30%): 30 trades * 4% profit = 120%
Losing Trades (70%): 70 trades * 1% loss = 70%
Net Performance: 120% - 70% = 50%
So, without slippage, the net performance over 100 trades would be 50%.
2. With Slippage (0.22% per trade):
Profitable Trades (30%): 30 trades * (4% - 0.22%) = 30 trades * 3.78% = 113.4%
Losing Trades (70%): 70 trades * (1% + 0.22%) = 70 trades * 1.22% = 85.4%
Net Performance: 113.4% - 85.4% = 28%
With a slippage of 0.22% per trade, the expected net performance is reduced to 28%.
So, slippage can significantly impact the overall performance of your trading strategy, reducing it from 50% without slippage to 28% with the assumed slippage rate of 0.22% per trade. It's important to minimize slippage to maximize your strategy's effectiveness.
Certainly, let's calculate the expected performance with the additional slippage rates of 0.44% and 0.66% per trade.
2. With Slippage (0.44% per trade):
Profitable Trades (30%): 30 trades * (4% - 0.44%) = 30 trades * 3.56% = 106.8%
Losing Trades (70%): 70 trades * (1% + 0.44%) = 70 trades * 1.44% = 100.8%
Net Performance: 106.8% - 100.8% = 6%
With a slippage of 0.44% per trade, the expected net performance is reduced to 6%.
3. With Slippage (0.66% per trade):
Profitable Trades (30%): 30 trades * (4% - 0.66%) = 30 trades * 3.12% = 93.6%
Losing Trades (70%): 70 trades * (1% + 0.66%) = 70 trades * 1.88% = 131.6%
Net Performance: 93.6% - 131.6% = -38%
With a slippage of 0.66% per trade, the expected net performance becomes negative at -38%.
In conclusion, our analysis clearly demonstrates the significant impact that slippage can have on the overall performance of a trading strategy. Slippage, which represents the difference between the expected and actual execution prices of trades, can erode profits and, in some cases, even lead to negative returns.
Starting with a baseline net performance of 50% without slippage, we observed how introducing slippage rates of 0.22%, 0.44%, and 0.66% per trade progressively reduced the strategy's effectiveness.
With 0.22% slippage, the net performance dropped to 28%, signaling a substantial loss in potential gains. At 0.44% slippage, the net performance further diminished to just 6%, and at 0.66% slippage, the performance turned negative at -38%, indicating substantial losses.
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