Slippage analysis is a process through which you can stay on top of your slippage costs. In fact, it can also help you put together a better financial strategy that uses past models to inform future decisions. Such processes, however, are not always easy to undertake, particularly if you don’t have the right tools for the job...
Why Should I Care About Slippage Costs?
When you buy a security at a higher price than intended, or sell a security at a lower price than you expected, then you incur a slippage cost. As we explored in last week’s article, however, these costs on one share or security are usually negligible, which is why they often go unnoticed.
Nevertheless, such small costs tend to add up. After all, as the American poet Julia Carney once wrote, ‘Little drops of water… Make the mighty ocean.’
But being out of pocket isn’t the only downside to ignoring slippages.
In fact, slippage costs explain how the market reacts to certain changes and news. Understanding that gives you the information needed to know when you should act. So, in other words, conducting slippage analysis can lead to fewer missed opportunities, too.
How To Use Slippage Analysis To Gain Back Control
Trade tracking and slippage analysis are two processes that you can undertake simultaneously to track the price history of securities and shares. Together, these give you many benefits. These include:
- keeping tabs on the slippage costs you’ve incurred;
- understanding how different events affect securities’ bid and ask prices; and
- collecting statistical evidence for when it’s worth entering or exiting a position, as well as when to limit orders.
So Why Don’t Most Managers Perform Slippage Analysis?
Most managers simply don’t have the time and the resources needed to perform proper trading cost analysis – which admittedly is not an easy task to do manually.
In fact, even managers that understand how crucial such analyses can be, tend to do them on random subsets of securities to keep them manageable. This, however, does not give you the full picture and does not explain how each security or share you’re investing in is affected by market changes.
This is why measuring such slippages through proper figures collected from all your actual purchases and sales is important... Indeed, it can breathe new life into your strategies and even help you build a stronger portfolio over time.
In our next article in this series, we’ll look at how a proper slippage analysis should be tackled; while in the one after that, we’ll explain what solutions are on the market that could make light work of your slippage analysis process... So stay tuned!