Why Ignoring Fees and Slippage in Your Backtest Is Dangerous

The first time you wire up a backtest, it usually runs with zero fees and zero slippage. If you choose strategies from that result without moving closer to reality, short-term strategies in particular will mislead you badly.

Three Cost Components

Component	Typical (Japanese equities)	Impact
Broker commission	0–0.1% per side	Small with modern brokers
Slippage	0.05–0.2% per side	Depends on liquidity and order book
Execution timing	Gaps can move 1%+	Open vs. close matters

Commissions vary by plan, but slippage is the hidden cost you have to estimate yourself.

Estimating Slippage

Slippage is the gap between theoretical and actual execution prices. Common models:

• Volume / depth ratio. Your order size as a fraction of book depth
• ATR-based. 5–10% of ATR as slippage
• Fixed bps. 3–10 bps per side for liquid large caps, 20+ bps for small caps

A realistic approach combines ATR-based + book depth awareness.

How Costs Reorder Strategies

Short-term strategies see their ranking flip when costs are applied. Example:

• Zero cost: CAGR +15%, 500 trades
• 0.1% per side: CAGR +5%
• ATR 10% slippage added: CAGR −3%

Strategies that look profitable before costs and negative after exist in real data. Without testing for this, paper-profitable systems die in production.

Tick Sizes and Gaps

Japanese equities have tick sizes that step up with price, and opening gaps are routine. If your backtest assumes market-on-open, check whether gap behavior is properly absorbed.

Pitfalls

• Overly harsh cost assumptions kill strategies that would actually work
• One-size-fits-all slippage. Large caps and small caps should have different coefficients
• Day / swing / position strategies. The longer you hold, the smaller costs loom proportionally

Try It in QuanTest

QuanTest exposes per-side commission and slippage as parameters. Run the same strategy with three settings — 0 / 0.1% / ATR-linked — and check whether the ranking of strategies changes.

For how to compare strategies overall, see this guide.

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This article is for educational purposes. It does not guarantee the profitability of any strategy or future performance. Investment decisions are your own responsibility.