The Secrets of Slippage

by Barry Rosen

How many times have you placed your stop at a key Fibonacci retracement target and gotten hit by the locals and stopped out? With everyone using Fibonacci numbers, you have to be one step ahead to win the race. Here are some tips. Fibonacci numbers work because crowds–including crowds of numbers–are dynamic systems that conform to mathematical laws. If you have ever been to the Museum of Science and Industry in Chicago, you may have seen the machine there that sorts balls randomly into eight slots and at the end of the run, the balls form a bell curve. Likewise, the Fibonacci numbers of .362, .500, .618, 1.618 and 2.168 etc., create important, predictable price values–even in the wild chaos of 400,000 T-Bond contracts traded daily in the pits. A bull market is likely to have a minimum retracement of .236 or .382, and if you are looking to get in an entry from the top that will get you filled, then a safe, tight stop may be the only slippage factor below the 38% retracement. Knowing Elliott Wave principles can also aid you in choosing the proper stop, and we would recommend the basic Elliott Wave books to guide you in that area. On double tops and bottoms, locals will usually pick–off a stop 1 or 2 ticks above or below the market, but a real breakout or breakdown will be occurring if the market goes through slippage. While each market has its own behavior patterns, the following slippage numbers can keep you out of trouble and prevent the locals from gunning you down. The following list shows the slippage factor for the most actively traded commodities: