Market Impact Is Nonlinear

Execution cost is not linear with size. Larger orders consume more of the book and move the price against you.

In calm regimes you can scale without noticing. In stressed regimes the same size becomes a price-moving event.

That is why strategies 'work' at small size and die at scale.

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.

Strategy works small → size up → impact increases → fills worsen → expectancy decays → trader tweaks signals → overfitting → drawdown.

How it kills accounts:

1. Edge looks fine in backtest.
2. Live spreads widen at the exact wrong moments.
3. Stops trigger inside noise, so you widen stops.
4. Same size + wider stop = silent leverage increase.
5. A normal spike becomes structural damage.

Test size. Measure impact.
Scale only if the strategy survives worse fills.
If your edge is small, your size must be smaller.

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.

At 1 contract you slip 1 tick. At 10 contracts you slip 4 ticks and miss exits. Your 'same strategy' is now a different strategy with different costs.

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.

Reality check

Market impact is the tax you pay for being right at size. If you want to scale, you need deeper edges or quieter venues.

Glossary: market impact, liquidity, expectancy.

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.