cost of getting into / out of the market

Discussion in 'Strategy Development' started by Bluegar3, Jan 14, 2008.

  1. I don't keep the greatest records, but I do keep some as I'm trying to find this out.

    If on paper your edge for a strategy is .15% with no commissions and slippage, what would have been your edge had you traded it live?

    Is the spread of the stock a function of the cost of getting into the market compared to made you paper traded it (like taking the close of a bar)? Well... if you want to get long and you hit the offer all the time yes. But I really don't think that it is. On the backtest you have a price. 1/2 the time that price is the offer and 1/2 time the price is the bid. So if you wack the the other side your slippage should be 1/2 the avg spread per side, however say..

    the price on the backtest is 50.00 the spread is 49.97 X 50.03. Say you bid @ 49.98. Everytime you get filled you you beat the backtested price by .02 but sometimes you don't... what is your true slippage???

    From my real time results my average cost differential from my real time results to paper traded backtested results is .01% on the average stock price of $44.00. That's only ~ 1/2 of a tick. I trade stocks that do ~ 1.5 million per day

    What are yours?
  2. lindq


    If there is any chance at all that the postive results of a backtest can be thrown into negative because of spreads and commissions, the odds are great that it isn't worth considering. You'll need more of an edge than that to succeed in real world conditions.

    While commissions can be a constant, spreads with equities aren't. It depends on the stock, and even with the same stock it can depend on market conditions and your entry strategy. A 2 cent spread can easily go to 20 cents in seconds if things start to move.

    You may go 5 trades with good fills and even some price improvement if you're lucky, but every once in a while you're going to get wacked, and that needs to be considered in backtesting.

    And running a backtest assuming that your limit orders will get hit is a fantasy. More often than not, the stock will just move on and leave you behind.