Slippage, Spread and Trading Costs
Trading costs include explicit commissions and fees, bid–ask spread, slippage, market impact and sometimes financing or borrow costs. A gross edge is useful only if realistic net outcomes remain acceptable.
How it works
Specify whether signals are valued at midquotes, last trades or executable sides of the book. A market buy often crosses the ask and a sell the bid. Avoid adding the full spread twice if your fill model already uses bid and ask. Borrow availability and overnight financing depend on the instrument and venue.
Worked example
A quote is 99.90 bid / 100.10 ask. Buying 100 shares at the ask and immediately selling at the unchanged bid loses 100×0.20=20. With commission of 1 each way, net loss is 22 before additional slippage. A backtest filling both sides at midpoint 100 would hide that round-trip cost.
Amounts, prices and scenarios are fictional teaching examples. They exclude any effects not explicitly stated and are not trade recommendations.
Limits and common mistakes
Costs vary with size, volatility, timing and liquidity. A flat average may understate stressed conditions. High turnover can consume a small gross expectancy even when each individual commission looks minor.
Knowledge check
Is the spread a guaranteed fee paid separately to the broker?
Read the explanation
No. It is a price difference between executable quotes. Its economic effect depends on order type and fills; commissions are separate explicit charges.
References and further reading
These sources explain the underlying concepts and specifications. They do not endorse QBMFX Academy. Check the relevant market, protocol version and reporting rules before applying an example.