Last Updated on November 15, 2018 by Oddmund Groette
One word I often use in my articles is the word slippage. 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.
Commission is a cost we know. However, costs related to buying and selling is not always easy to measure. When testing a strategy the entry and close is estimated on an executed price. In real life you never get those prices. If your test shows an entry on 100, trading this strategy live you might buy those shares on 100.02 instead. That means your strategy will be less profitable than when testing.
My experience tells me that the test results will always be much better than real trading. I calculate that my test results will be halved when trading it live. Not only because of slippage, but also because of the ever changing market cycles. Testing strategies always curve fits more than you think.