Here’s the scoop straight from the SEC on limit orders. 

Extra Insight:

Limit orders are one way to reduce slippage because you specify the exact price you are willing to accept.

Backtesting with end-of-day data models limit orders reasonably well for liquid markets.    The backtesting engine will execute the whole order if the stock traded at limit the price during the day.  This is what normally happens in live trading.    Sometimes in live trading though, the full limit order doesn’t execute, but only a smaller number of shares are traded at the limit price.   This can happen if the limit order is larger than the market can bear at the time.

A small private trader is unlikely to get a partial fill in a large liquid market.   By sticking to high volume stocks, its possible to understand more about the differences between market orders and limit orders via backtesting.

There are Limit-on-Close (LOC) and Limit-on-Open (LOO) orders which corresponds to Market-on-Close and Market-on-Open orders, respectively.   I don’t use them in backtesting though.

Updated: 11/12/08.

Tags: backtesting, data, limit order, market-on-close, market-on-open, trading

When using a market order, the price is not agreed in advance. An order, even a small one but especially large ones, might move the market and be executed at a surprising price!   The difference between the price quote and the price paid is known as Slippage in the stock trading world and skid among commodity traders.  Most backtesting engines allow the user to make an assumption of how much slippage effects each trade.

Extra Insight:

For my backtesting, I assumed zero slippage.  This is not realistic for market orders but is realistic for limit orders.

Using limit orders in live trading is one way to reduce the cost of slippage.    Trading less frequently is another.

(Backtesting Blog is an Amazon Associate.)

Updated 11/13/08.

Tags: backtesting, limit order, market order, skid, slippage, trading

I start this blog while immersed in the early phases of my fourth major US stock market backtesting effort. 

The purpose of the blog is to record my key decisions and tactics for backtesting.   I intend it to be a resource for traders and active investors . I hope that others will learn from my efforts and we all learn from each others’ comments and discussion.

My goals for backtesting are:

1. Design trading strategies for my own use.   Specifically, 

• US Stock Market
• both buying long and short selling 
• investigate both trend following and band trading  
• swing trading: end-of-day (EOD) or daily charts and trades that last several weeks  

2. Provide information that other traders can use to develop their own systems.    That includes the areas above, and in addition, I want to illustrate for new traders such key concepts as:

• stop loss orders 
• market orders vs limit orders vs stop entry orders
• trailing stops
• price targets
• indicators like moving average, RSI, MACDH, Stochastic

3. Do this with a scope and scale that goes beyond the resources typically available to private traders, including:

• delisted stocks
• over 15 years of historical data
• clean database
• multiple time periods to avoid curve fitting
• crude and robust strategies only…limited fussing with parameters
• statistically sound methodologies
• monte carlo simulations to generalize beyond the given data

 Let’s dive in!

(Backtesting Blog is an Amazon Associate.)

Tags: backtesting, data, goals, limit order, macdh, market order, rsi, stochastic, stop loss, swing trading