Trading Costs

A trade earns 12 basis points before costs. Fees, the spread, and slippage leave just 1. Here’s how to check what your backtest actually includes.

A backtest can look profitable until you add the trading costs it left out. When each trade earns very little, fees, the bid–ask spread, and slippage can eat most of the profit—and trading more often repeats the bill. So where did the money go? Start with one trade, then check how the backtest accounted for each cost.

The final return alone won't tell you what was included. You need to look at the assumptions behind the fills and the costs already deducted from the result.

Start with the math on one trade

Suppose a strategy earns 12 basis points before costs on a round-trip trade. A basis point is 0.01%, so that's a gross return of 0.12%. Opening and closing the position costs 6 basis points in fees, and the spread and slippage cost another 5.…