Hidden costs: spread, commissions and slippage
Here's one of trading's open secrets: almost nobody loses purely from "trading badly". Many lose to friction — the costs charged on every trade that a clean backtest never sees. Understanding this saves you more money than ten indicators.
The four tolls
| Cost | What it is | When it bites |
|---|---|---|
| Spread | The gap between the buy and sell price. You're born losing that amount: you enter at a price and could exit instantly at a worse one. | On EVERY trade. Spikes in dead hours and on news. |
| Commission | A fixed fee per trade (typical on ECN / "raw spread" accounts). Charged on open and on close. | On every trade, on top of the spread. |
| Slippage | The difference between the price you asked for and the one you got. In fast markets, almost always in the broker's favour. | On market orders, volatility and news. |
| Swap / rollover | Interest you pay (or earn) for holding a position overnight. | Every night you leave the position open. |
How cost eats the edge
Imagine a strategy that wins on average +2.5 pips per trade before costs. Sounds good. Now subtract a 1.2-pip spread and a commission worth 0.7 pips: your real gain drops to +0.6 pips. You've lost three quarters of the edge without changing a single rule. And if the strategy trades a lot, cost can turn it outright losing.
This is why the backtest lies. Most backtests use a fixed spread and zero slippage/commission — a fantasy world. In the real market the spread widens exactly when your system wants to trade (news, opens), slippage worsens your entries and commissions pile up. A system that shows +30% a year on paper can be flat or losing live from friction alone. That's exactly what we measure in the lab and with the validation service: we run the bot through real ticks, which carry the real cost inside.
What to do about it
- Count the cost before trading. Work out how much spread and commission take per month with the real cost calculator. If it scares you, you're trading too much.
- The more you trade, the more it weighs. Ultra-high-frequency scalping is where cost rules; a strategy with fewer trades and bigger moves dilutes the friction.
- Avoid dead hours and news if you don't want wide spreads and slippage — see market sessions.
- Demand plenty of margin from your edge. A healthy rule: your target (TP) should be at least 10× the spread; if your average gain barely beats the cost, you don't have an edge, you have an illusion.