Execution: order types, spreads and slippage during the day

What you will learn

• How spreads and order-book depth change across the trading day
• When to use a marketable limit order, a bracket order or an OCO order intraday
• How to measure execution quality with implementation shortfall
• How to express slippage in R and adjust position size for it

Explanation

Order types, the order book and slippage mechanics are covered in depth in the course "Order Books, Liquidity & How Orders Are Filled". This lesson applies them to the speed and repetition of day trading, where small execution costs are paid many times a week.

Spreads change during the day

The spread is the difference between the best bid (highest buy price) and the best ask (lowest sell price). For most stocks and index products it follows a pattern:

• First minutes after the open: spreads are often wider and the order book is thin, because market makers are still adjusting to overnight news.
• Middle of the session: spreads are often tightest, though volume can fall around midday.
• Around scheduled news and the close: spreads can widen suddenly, and liquidity can disappear for seconds.
• Pre-market and after-hours: fewer participants, wider spreads, larger jumps.

Rule of thumb: record the typical spread of each instrument you trade at three times (open, midday, one hour before the close). If the current spread is more than twice your recorded normal spread, wait or reduce size.

Order choices for intraday entries

• Market order: fills immediately at the best available prices. Fast, but you do not control the price; in a thin book it can fill at several levels.
• Marketable limit order: a limit order (an order with a maximum buy price or minimum sell price) placed slightly through the current ask (for a buy) or bid (for a sell), for example two ticks. A tick is the smallest allowed price step. It caps the worst price you accept.
• Bracket order: an entry order with a stop-loss and a profit target attached. When the entry fills, both exit orders become active automatically.
• OCO order (one-cancels-other): two linked orders; when one fills, the other is cancelled. In a bracket, the stop and the target are usually linked as OCO.

For exits in fast markets, a stop-market order (becomes a market order when triggered) will normally close the position but can fill far beyond the stop price. A stop-limit order limits the fill price but may not fill at all, leaving you in a losing position. Because getting out matters more than the exact price, many day traders use stop-market orders for protective stops and limit orders for targets.

Measuring execution quality

Implementation shortfall is the difference between the price at the moment you decided to trade (the decision price) and your actual average fill price, multiplied by the position size. Slippage is the difference between the expected price and the fill price. Expressing both in R (one unit of planned risk) shows how much of your risk budget execution consumes.

Actual loss in R = (entry fill − stop fill) × shares ÷ planned risk in €

Worked example

Hypothetical example: a trader with a planned risk of €100 per trade (1R = €100) wants to buy a share just after the open. Assumptions: decision price €50.00, stop €49.70, no commissions, no taxes.

1. Planned risk per share: €50.00 − €49.70 = €0.30.
2. Position size: €100 ÷ €0.30 = 333.3, rounded down to 333 shares.
3. The spread is €0.06 at the open. A market order fills at an average of €50.08 across two ask levels. Entry shortfall: €0.08 × 333 = €26.64.
4. Price falls. The stop-market order triggers at €49.70 but fills at €49.64. Exit slippage: €0.06 × 333 = €19.98.
5. Actual loss: (€50.08 − €49.64) × 333 = €0.44 × 333 = €146.52.
6. In R: €146.52 ÷ €100 = 1.47R. Execution added €46.62, or about 0.47R, to a planned 1R loss.

A marketable limit order at €50.02 would have capped the entry cost; a missed fill is an acceptable outcome. Commissions, fees and taxes are excluded and would increase the loss.

Common mistake

Practice activity

On paper, using hypothetical data: you short an index CFD (contract for difference) worth €2 per index point. Your plan: sell at 15,000, stop at 15,020, planned risk €200.

1. How many contracts do you trade?
2. Your sell order fills at 14,996, and later the stop fills at 15,023. What is your actual loss in € and in R?
3. How much of that loss comes from execution?

Key takeaways

• Spreads and depth change through the day; compare the current spread with your recorded normal spread before entering.
• Marketable limit orders cap entry costs; stop-market orders prioritise getting out.
• Measure execution with implementation shortfall and express it in R.
• Include average slippage in position sizing, or your real risk per trade will be larger than planned.

Next step

In the next lesson you will turn per-trade risk into a full set of intraday limits: daily loss limits, trade counts and position limits.