Noel
Campbell 		When you are testing your trading model you must realistically consider factors that will affect your outcomes in the real time trading environment.Factors, such as slippage on entry and exits must be taken into account when calculating your paper profits during testing.Slippage is the difference between your planned entry and exit prices and the actual fill prices you receive.Last week I touched upon the fact that the spread between the bid and ask will be greater on ISF’s compared with the underlying stock.This larger spread will increase the slippage on your entry and exits.

This week we will use Telstra (TLS) as the example.As I write, the current bid and ask for TLS shares is $4.67/$4.68, while TLS ISF’s (code TA) is trading at $4.57 / $4.61, spreads of 1 cent and 4 cents respectively.This would mean that you could expect slippage of about 2 to 4 cents on your entry and exit prices when trading the ISF.

Chart 1

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Chart 1 shows a recent trade using the daily bar chart to identify the ABC points.The profit per contract on this trade is 5 points (5 cents), after being stopped out under the 50% milestone. Taking into account slippage, the profit would be closer to zero, a point that should not be overlooked!(Note that the chart of the underlying stock is again being used to identify the trade.)

Chart 2

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In Chart 2, we have another recent trade on TLS, however this time we are using the weekly chart to identify the trade.The rules for ABC trading essentially remain the same using this time frame.In this second trade, profits are taken at the 75% milestone ($4.73), yielding a total profit of 21 points per contract (21 cents).Clearly with the larger range obtained by using the weekly chart, the impact of slippage is reduced considerably, making trading over this time frame far more effective.

When trading shares using ISF’s, you would be looking for a reference range that represents at least a 5% movement in the price of the share.You will find it difficult to regularly obtain that size range when studying the daily chart.Considering the impact of slippage and the need for a good size reference range, starting your research on the weekly charts is a wise move.The minimum would be to test your system on both the daily and the weekly charts, letting the results speak for themselves.

Until next week…

Noel Campbell