Mechanism
Costs are not a footnote. They are an ever-present drag that compounds with frequency.
High turnover strategies pay the spread repeatedly. Slippage increases in fast markets. Financing (swap) bleeds overnight positions. Commission stacks on top.
Many “profitable” ideas die once you apply realistic costs.
Microstructure note: stops fail most often at the same time liquidity disappears. That is not bad luck; it is structural. Your job is to avoid competing for fills in the worst queue.
- Prefer “don’t trade” windows over cleverness: rollover, open/close, data prints.
- Reduce size before you reduce stop distance. Size is the only lever that always works.
- Measure slippage by regime, not by average.
How it kills accounts
Overtrade → pay spread repeatedly → small edge turns negative → chase to recover → increase size/frequency → costs scale → ruin.
How it kills accounts:
- Edge looks fine in backtest.
- Live spreads widen at the exact wrong moments.
- Stops trigger inside noise, so you widen stops.
- Same size + wider stop = silent leverage increase.
- A normal spike becomes structural damage.
Rule that survives
Model costs first, not last. Treat costs as part of signal design.
If your average win is not comfortably larger than total friction, stop trading it.
Track friction per trade (spread+commission+slippage+swap).
Rule that survives:
- Spread is a gate, not a footnote. If it’s abnormal, you don’t trade or you trade smaller.
- Assume worst-case fills in fast markets.
- Size is the adapter: reduce size before changing the stop model.
Example archetype
A strategy shows a tiny win per trade in a backtest. Live, the spread and occasional slippage erase it. You respond by trading more. The system dies faster.
Tell: if the trade only works when the spread is tight and price is smooth, it’s not an edge, it’s a regime bet.
Deep dive
Why brokers love “high activity”
Because friction is paid per action. Your job is not to be busy. Your job is to be selective.
Related: Break-even stops starve expectancy and Paper trading is polite fiction.
Glossary: spread, slippage, swap/rollover.
Field checklist
- Measure spread before entering. If it’s abnormal, you’re trading the wrong product at the wrong time.
- If volatility expands, reduce size first. Don’t “solve” it by widening stops with the same size.
- Avoid the predictable liquidity holes: rollover, session open/close, first minutes after data.
- Assume your stop may fill worse than your entry. Price the worst-case, not the brochure.
- If you cannot explain where liquidity comes from, trade smaller.