I'm doing some testing of systems on Forex, I calculate a transaction cost consisting of the spread + commissions, if I'm trading say the EUR/USD this works out at roughly 1.5 pips (for say IB). How do I do the same thing for stocks? I can see the commission costs on the IB website, but what are the typical spreads for well known stocks? (GOOG for instance), how would I calculate a transaction cost?
You can get historical bid/ask spreads. Search Google. Most exchanges sell data of this kind. Apart from doing just an academic study, this type of calculation is useless IMO. Slippage is much more important in trading than transaction costs. You miss a good entry and that can amount to the sum of commissions paid for the whole year. Just go IB and forget about commissions forever. Bill
Craig, Most liquid stocks trade on spreads of 0.2 - 0.3% of their value. I like to use numbers like 0.6% of the value to account for spreads and slippage, then add my commissions on top of it. If your strategy can hold up on those type of transaction costs, it is probably robust. The big caveat is that shorter term trading is exponentially more difficult to test. The easiest strategies to backtest are the ones with longer time horizons.
More or less. If PFE trades at 21.00 bid, I assume that I'll get filled around 21.126 ask. 21.00 * 1.006 = 21.126