Commissions and Slippage in Backtests: Why a Great-Looking Result Can Lose Money

Forgetting costs is the most common backtest mistake. There are three items:

1. Commission and fees

Broker commission, exchange and clearing fees and any taxes. They apply separately to every buy and every sell.

2. Spread

The difference between the bid and ask price. If you trade with market orders you pay it. Spreads are wide on low-volume stocks.

3. Slippage

The difference between the price you asked for and the price you got. It grows in fast markets, at the open and with large orders.

Why it matters

In strategies that trade often, the small cost of each trade adds up and can erase the profit. A strategy can look good in a cost-free test and lose money in a costed one.

How to apply it

• Assume a fixed percentage cost per trade and try two scenarios (optimistic and cautious).
• If it is not positive in both, do not trust the strategy.
• Apply the same costs in paper trading so the two stages stay comparable.

Next

For the general method see the Backtesting and Paper Trading Guide. For how costs differ by market see backtesting on BIST.

This article is for education only and is not investment advice. Past results do not guarantee future results; trading carries a risk of loss.