Commissions and slippage in trading: why a strategy loses money

Almost every trader is faced with the same situation: the strategy looks reasonable, the signals are being worked out, there are no gross mistakes, and the result is worse than expected. This is usually attributed to a market, a phase, or a "bad period." Less often, it affects the design of the strategy. And almost never on the cost of execution.

Commissions and slippages are perceived as minor details. Small percentages that "can't ruin everything." In practice, they are the ones who do this most often. Not abruptly, not noticeably, but gradually — eating up the weak advantage of deal after deal.

This article examines one specific mechanism: how fees and slippage turn a formally working strategy into an unprofitable one, even if the inputs are logical and the rules are followed.

Trading commissions: why "pennies" per trade matter

A commission is a fee paid to a broker or exchange for executing an order. It is always written off: both in a profitable transaction and in an unprofitable one. This is the key difference from a stop or take — the commission does not depend on the result.

At the level of a single transaction, it seems insignificant. 0.05%, 0.1% or a fixed amount — it is almost imperceptible against the background of price movement. The problem is that a strategy is not a single deal, but a series.

The commission is scaled not by the amount of winnings, but by the number of transactions. The more active the trade, the faster it turns into a constant negative flow.

If the strategy involves:

1. intraday trading,
2. frequent entrances and exits,
3. position reversals,
4. trading on small movements,

The commission stops being a "small thing" and starts working as a tax on every attempt to earn money.

It is important to fix a simple thing: the commission makes the zero strategy unprofitable automatically. If the mathematical expectation is about zero without it, the sign of the result changes after it is taken into account.

How much does the commission really eat up the profit on the distance

The mistake of most traders is to look at the commission as a percentage of the deposit, rather than in the context of the model.

It is correct to evaluate the commission not "how much I paid for the month", but how much it took from the expected result of one transaction.

If the strategy earns, on average, 0.3R per trade, for example, and the commission + spread + slippage is 0.2R, then the real expectation is 0.1R. Any deterioration in performance completely destroys the advantage.

The strategy may look stable based on history. In reality, it is gradually falling apart.

That is why in the analysis of the real economy of trading, where the strategy is considered as an economic model with probabilities and costs, commissions are never taken out "at the end". They are part of the basic design, not an after—the-fact adjustment.

Slippage in Trading: Why the Strike price is worse than the Plan

Slippage is the difference between the expected strike price and the actual one. Simply put: you planned to enter or exit at one price, but the market gave you another one.

Unlike commission, slippage:

1. unstable,
2. not fixed,
3. depends on the environment.

It occurs most often when:

1. The market is moving fast,
2. Liquidity is limited,
3. a market order is used,
4. the transaction volume exceeds the available liquidity at the best price.

For a trader, it looks like "bad luck." For a strategy— it's like a systematic deterioration of statistics.

Models with are particularly sensitive to slippage.:

1. short stops,
2. Small R:R,
3. trading on the news,
4. high frequency inputs.

If the average profit of a trade is small, even a small regular slippage makes it statistically insignificant.

Why is the slippage not visible in the backtest?

One of the reasons why traders underestimate this factor is the backtest.

In the tests:

1. the execution price is considered ideal,
2. liquidity is assumed to be sufficient,
3. There are no delays,
4. emotions do not influence the decision.

The real market works differently. Even with automatic trading, the execution is not sterile. And in manual trading, there is also a human factor: late clicks, doubts, cancellations.

As a result, there is a gap between:

1. the fact that the strategy should earn,
2. and by what she really earns.

And if this gap is not built into the model in advance, it always works against the trader.

Fees and slippage as a constant negative edge

It is important to understand the fundamental thing: costs are not a mistake, but an environment.

They don't happen "sometimes". They are always present. This means that the strategy starts with a negative expectation bias. Before making money, the trader must close it.

If the statistical advantage is weak, costs become the deciding factor. It is not the market that "breaks" the strategy, but its sensitivity to real execution.

For this reason, many models:

1. They look logical,
2. they have a high win rate,
3. They give you a sense of control,

but they are slowly losing money.

Not because the trader breaks the rules. This is because the rules do not take into account the cost of their execution.

Transaction Frequency and hidden costs: Why Activity accelerates Wear and tear

Intuitively, it seems that more deals mean more opportunities to earn money. In reality, every transaction is:

1. adds a commission,
2. increases the total slippage,
3. enhances the effect of randomness.

If the strategy has a small edge, the increase in activity does not enhance the result — it accelerates its manifestation. If the edge is negative or close to zero, an increase in the number of transactions accelerates the degradation of capital.

It looks like a business with minimal margin. While the turnover is small, the losses are not obvious. When zooming in, the weakness of the model becomes visible.

Why is the "almost zero" strategy always unprofitable in reality?

There is no "zero" state in trading. This is a fundamental difference from classical business.

If the mathematical expectation of the transaction is:

1. equal to zero,
2. or slightly above zero without taking into account the costs,

then after accounting:

1. commissions,
2. The spread,
3. slippage,

the result becomes negative.

That is why it is so important to consider a strategy not as a set of signals, but as an economic model. This approach is discussed in detail in the material "The Real Economy of Trading: why most strategies don't work," which shows that without a margin of safety, any model falls apart upon contact with the real environment.

How to understand that costs are killing your strategy?

There are several signs that are rarely directly associated with fees and slippage.:

1. the strategy works on history, but "does not survive" in the real world.;
2. the result fluctuates around zero with high activity.;
3. small market changes completely break the bottom line;
4. profitable periods are short and unstable.

In all these cases, the problem is often not the entry point or the discipline, but the fact that the edge is too small to cover the cost of execution.

A practical conclusion on this issue

Fees and slippage are not minor details, but a permanent negative factor built into the very structure of the market. They don't "get in the way sometimes" — they always work.

If the strategy does not include them in the calculation:

1. She may look reasonable.,
2. may have a high win rate,
3. can be performed in a disciplined manner,

but he almost inevitably loses money at a distance.

The practical criterion is simple: if the average result of a transaction does not have sufficient margin after accounting for all costs, the strategy is not economically viable. Not because the market is complicated. But because the model does not stand up to real execution.

It is from this moment that trading ceases to be a game of signals and becomes a calculation. Everything else is a consequence.