The impact of slippage on performance

Understanding the Impact of Slippage on Performance

While our current calculations consider the balance between utilization and performance, it's important to note that capping TVL to maintain high performance is crucial. Larger position sizing can negatively impact profits, particularly when accounting for slippage—the difference between expected and actual execution prices of trades.

To illustrate this, let's assume the following parameters:

  • Win rate: 30%

  • Risk-to-Reward ratio: 4:1 (for every 1% risked, we aim for a 4% return)

  • Profit per trade: 4%

  • Loss per losing trade: 1%

  • Extra slippage per trade: 0.22% (as indicated by performance reports)

Out of 100 trades, 30 are profitable, yielding a 4% return per trade, while the other 70 hit the Stop Loss at 1%, with both types of trades affected by slippage. Let's calculate the expected performance with and without slippage based on these assumptions.

1. Without Slippage:

  • Profitable trades (30%): 30 trades × 4% profit = 120%

  • Losing trades (70%): 70 trades × 1% loss = 70%

  • Net performance: 120% - 70% = 50%

Without slippage, the expected 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 0.22% slippage rate per trade, the expected net performance is reduced to 28%.

3. With Increased Slippage (0.44% and 0.66%):

Let’s calculate the impact of higher slippage rates—0.44% and 0.66% per trade.

a. Slippage at 0.44%:

  • 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 0.44% slippage, the net performance drops to 6%, indicating a drastic reduction in profitability.

b. Slippage at 0.66%:

  • 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 0.66% slippage, the strategy results in a negative performance of -38%, indicating significant losses.

Conclusion:

This analysis demonstrates how slippage can have a profound impact on trading performance:

  • Starting with a baseline net performance of 50% without slippage, even a small slippage rate of 0.22% reduces the net performance to 28%.

  • As slippage increases to 0.44%, net performance declines to 6%, and at 0.66%, performance turns negative (-38%).

Minimizing slippage is crucial for maintaining profitability. Even with a high win rate and favorable risk-to-reward ratio, slippage can erode gains, emphasizing the need for efficient execution strategies to maximize the effectiveness of the overall trading strategy.

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