Last Updated on August 26, 2021 by Oddmund Groette
One word I often use in my articles is the word slippage. What is slippage in trading? Slippage is a hidden cost that is difficult to quantify.
What is slippage in trading?
Simply explained this means the difference between fictional results when testing strategies, and the actual results in real life adjusting for commissions and transaction costs. It’s a “hidden” cost.
Commissions are a cost we know. However, costs related to buying and selling are not always easy to measure. When you backtest a strategy, the entry and close are estimated on an executed price.
But in real life, you never get those prices. If your test shows an entry on 100, in live trading this strategy might buy those shares at 100.02 instead. That means your strategy will be less profitable than when testing. This is slippage!
My experience tells me that the backtest results are always much better than real trading. As a rule of thumb, I anticipate that my backtests will result in 50% lower profits in live trading. Not only because of slippage but also because of the ever-changing market cycles. Testing strategies always curve fits more than you think.
Disclaimer: We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinion – they are not suggestions to buy or sell any securities.