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Thanks to all for the replies - a wealth of info here.
The info inspired me to hop back in - $275 on /ES today at the open (my favorite 'setup'). Have to go back and study the markets more. Still would like a better platform - looking into Sierra Charts and NT. At any rate - hopefully the thread will continue and others can share...
Thanks for taking an interest in this topic. A toxic fill is when your limit order entry gets filled as a function of the market trading through your price level. Being in the back of the queue you typically only capture a fill by virtue of adverse selection. And because of this, you end up starting your trading with an instant - 1 tick position.
Here is a scenario to illustrate this.
You join the queue of Bids late and you are number 98 in the queue and there is a total volume of 100 Bids. On the Ask side there is a total volume of 500. The market orders take out all 100 Bids before they take out all 500 Asks, and by the time you get filled ( you are # 98 out of 100 in line), the Bid side collapses driving the price down by 1 tick to the new lower bid ask price level.
By contrast the ideal state every trader is hoping for (whether they realize this or not) is to be on the opposite side of this scenario. When the 100 Bid orders get taken out, at least some portion of the 500 Ask orders would have gotten filled as well. Although we can tell that for sure not all 500 ask orders were filled, those in the very front of the queue would have gotten filled. As a result of choosing the right side and being early enough in the queue, they will start their trade with a + 1 tick profit.
So to give you an idea where everyone in the retail world falls into these scenarios here is short answer.
1. You will get filled 100% of the time on the side that loses by virtue of the fact that in order for this side to collapse everyone in line has to get filled. (This is the toxic fill)
2. You will only ever catch a fill on the winning side if you are far enough up in the queue to get filled before the opposite side breaks. Due to the fact that only the top k % of the winning side will get filled, you will typically not make this cut even though you picked the right side. So you might pick the winning side and get filled only 10% to 25%.
With points 1 and 2 in mind, I estimate for the average retail trader a toxic fill rate over 80%.
So for anyone trying to figure out their overall expectancy I would advise using this assumption vs. the assumption that a limit order entry will get you flat to start the trade.
For those interesting in researching how to improve your toxic fill rate.... This is a whole different discussion. I have a thread started here for that.
This is a topic that I think is very critical to every trader but is often overlooked. So I just wanted to kick this off as an open discussion so we can share ideas, strategies and gain some best practice insights on how to improve this statistic.
For …
Thanks,
Ian
In the analytical world there is no such thing as art, there is only the science you know and the science you don't know. Characterizing the science you don't know as "art" is a fools game.
Another $237.50 today on scalps using sensible stops and defined limit orders on both buys and sells. Something I had read over and over in my education, yet failed to actually do...hearing from forum members drove the point home.
Thank you for explaining with detail. Is this mainly a concern for scalping strategies of a few ticks?
When I enter market orders based on my setups, I get filled with 0 to -2 ticks spread, then it is recovered after a few seconds to a minute depending, on the strength of the prevailing trend. Sometimes when the price whipsaws, and I've set a limit order, I've instantly received +1 to +3 ticks.
I do agree with having a conservative back testing expectations (double the expected slippage and commission, and if you come out on top with a good MFE & MAE, then the strategy could be promising).
I would say that as stop loss size decreases, the - 1 tick penalty due to toxic fills increases in importance. If someone is setting their stop loss at 2 to 3 ticks, then the 1 tick being lost immediately via toxic fills is making up 25% to 50% of the total stop loss. I wouldn't necessarily characterize this as only a problem for scalpers because a lot of non scalpers that aim for 10- 20 tick profit targets still use very tight stop losses of a few ticks. So this becomes a key part of ones strategy as the stop loss size approaches 1, no matter what their profit target size looks like.
Depending on your SIM platform you may or may not have accurate fill rates on limit orders. For example, a simple HLOC bar based backtester will typically not consider volume or your place in the queue at all. You will get filled in a lot of cases if the bar even touches your limit price. Some systems allow you to only get filled if the price trades through your price, others will fill it on the first touch. The better platforms will have volume based fill logic that considers your place in the queue, etc. Just make sure to understand what assumptions your backtester / SIM engine are using regarding limit orders. Because these can be way off, and lead you down the wrong path with unrealistic assumptions.
Happy Trading!
Ian
In the analytical world there is no such thing as art, there is only the science you know and the science you don't know. Characterizing the science you don't know as "art" is a fools game.
If you are not ready to have overnight risk or have any skin in the game I would not trade. I think it is human nature to have quick gains without any risk but trading and investing do not work like that.
Not to be downer, but I see many wasting countless hours on these complex scalping methods on here. Many have come and gone on this forum, very few people are profitable scalping why even waste the time and money. Buys some shares of AAPL or VTI and actually make money
Volatility is good for the market and trading.
Preservation of capital is the most important concept for those who want to stay in the trading game for the long haul. - Van Tharp
So, if I follow your logic, the reason I make money scalping is because my method is simple. This is what I've been trying to tell people for the last year. Thanks for making it so clear.
It's great that you're apparently profitable, but it's a waste of time telling those of us who do very well by "scalping" that it can't be done.
FWIW, I didn't trade 35 times, but Ninja shows as separate trades the fact that my contracts exit at different targets. Still, the percentage of win/loss is about the same.