I trade smaller stocks and the biggest elephant in the room for my system is at what point does slippage start to make my system invalid or become so significant it eats up my profits.
I assume the logical way to think about this would be to think of it as a percentage of total daily volume. I also only do "at open" and at "close orders" so am trading at the highest volume times of the day.
So...considering the following example....Stock XYZ is trading at $5 and trades 1,000,000 shares a day. Very roughly, how many shares traded at open or close starts to cause significant issues?
Slippage is a function of order size and liquidity.
As you pointed out, liquidity is cyclical too.
So How much ? is conditional on specific situation.
It's too much when it becomes too expensive.
And again ... Expensiveness is relative ...
I'd consider it excessive if it takes 5 ticks to be filled.
But it's my point of view only. Because 5 ticks becomes 50 ticks.
Quick enough if everyone is caught by panic or any liquidity crisis.
To be able to quantify how much liquidity lies at the bid & ask is insightful.
I use a Deep Of Market to place my orders, so I can see the depth.
Sometimes very big orders sit there, if you're lucky, it's for you.