TSX TrendWatch Weekly

Seasoned traders know the importance of good trade execution, but many novices and intermediate level investors overlook this completely… often to their detriment.  For those, we’ll offer some comments below. But first, more good news from last week’s activity.

WEEKLY REVIEW… Another pleasant upside of +2.1% on the last week. Practically the same for the Venture Exchange (+2.2%).

For a change the major US indexes fared a little better last week, with gains in the +3% area.

All sector indexes have positive trend values now.

Regular readers will know that I’m not one to predict where the markets are going… I just go with the flow, and that’s so much easier than pretending to know what the future will bring.

I’ve had good feelings though, as soon as our %-up figure bounced off 41% and right into 50%+ territory again. This is where we want to be. With last week’s gains, we nowS&P/TSX Composite Index  have 76% of stocks in the S&P/TSX Composite Index trending higher. The median gain per week is up to 0.7%.  It’s so much easier to press that buy-button when the overall market is pushing you to do so, like it is right now.

SLIPPAGE…  With the much lower trading commissions in the last few years, it’s almost tempting to ignore them. $10 or less on even a small trade of a few thousand dollars is pretty small in percentage terms.

What many investors tend to forget, though, is that trading costs = commissions + slippage.  Slippage is when your trade doesn’t go through at your expected price, and that tends to happen with market orders rather than limit orders. Mutual fund investors who switch over to buying and selling stocks are often the last to catch on to slippage.  They’re used to buying and selling funds at a kind of “sticker price”… the price posted at the end of the previous day.

Stock prices aren’t like that. Throughout the day there is a bid price (what you’ll get if you were selling at that moment in time) and an ask price (what you’d have to pay to acquire some shares at that moment in time). Novice investors will place a market order, thinking that they’ll be buying or selling at or very close to the last trade they see posted online. Not necessarily.

Supposed that a stock traded last at $10 and the current bid/ask spread is $9.95/$10.05. If you expected that your buy or sell market order would  be executed at $10, you’d probably be wrong. At that moment in time slippage is a nickel.  You’d pay 5 cents more or sell at 5 cents less… half a percentage point which is pretty good as far as slippage goes.  But what if the bid ask spread was $9/$11? On the buy side that means that you’d be paying 10% more than the last trade.  That’s pretty significant!   If that percentage spread stayed the same until the time you were ready to sell, you’d have to have a net capital gain of over 20% just to break even (excluding the commission penalty).

That may seem pretty extreme, but it happens all the time with stocks trading in the pennies or a few dollars per share. It also happens with stocks with a small float (the number of shares actively trading). It also  happens with volatile stocks.

With an actively traded stock with lots of outstanding shares in distributed hands, slippage isn’t a major problem except perhaps in market crash conditions.

The important thing is that even with what you consider to be a great opportunity, you should look at…

• Shares outstanding (keeping in mind that some may be big blocks that don’t trade often)
• Trading volume per day  (if no one wants to buy or sell, when you want to sell or buy, you’ll pay a penalty)
• Buy/sell pressure (if you see that there are 1000 lots to sell and only 5 to buy, you’re going to pay a big penalty if you’re on the sell side too)

Market capitalization (no. of outstanding shares X current price/share) is also important, if you prefer large caps which typically don’t have as much volatility.

In short slippage is important because it can force you to pay a (sometimes extensive) penalty before you even get started. The same goes for the sell side.

Unless your really need to get in or out of an equity position quickly, limit orders are the way to go. Your buy/sell order will only be executed at the price you specify. The downside to that is that you’re order will only be filled quickly if your price is very close to the last trade price. keep in mind that bid/ask prices move as fast as the last trade prices over the trading day.

I could go into more detail, but that covers the basics.  Without attention to slippage, it could take much longer to achieve your desired goal on a trade than you thought, even it you’re predictive model is fairly accurate.

Trade wisely, my friends!