Realistic simulation
Backtesting With Fees and Slippage
Fees and slippage reduce strategy returns whenever trades execute. Their impact grows with turnover, position size, spread, volatility, and limited liquidity, so realistic assumptions should be applied before evaluating a result.
Separate explicit and implicit costs
Commissions and exchange fees are explicit. Spread, market impact, delayed fills, and slippage are implicit. Both can materially affect frequent strategies.
Avoid perfect-price execution
A signal calculated from a closing price cannot normally execute at that same known close without an explicit auction or order assumption. Align signal availability and fill timing.
Stress-test assumptions
Re-run tests with less favorable cost and fill assumptions. A result that disappears after a small adjustment may not be robust enough for further consideration.
Research checklist
- Commission schedule
- Bid-ask spread
- Slippage and market impact
- Signal-to-fill timing
Questions and answers
How does slippage affect backtesting?
Slippage moves simulated fills away from ideal prices, generally lowering returns and sometimes changing which trades occur.
How do trading fees affect results?
Fees reduce every trade’s net outcome. Their cumulative effect can dominate high-turnover strategies even when each fee is small.