How Spread and Slippage Change a Backtest

The two costs in five lines

Two costs a backtest is apt to forget. The spread is the gap between the price you buy at and the price you sell at, paid on every trade; slippage is the gap between the price you asked for and the price you got, paid on the way in and on the way out. A tester often assumes neither, or one fixed spread and no slippage. The arithmetic is plain: a 0.9-pip spread plus 0.3 pips of slippage each way is 1.5 pips a trade, where a pip is the fourth decimal place of the price, times the number of trades. The plain 10:00 to 18:00 rule on the euro made 150.3 pips over 135 trades in 2026 before costs, 28.8 after the spread, and minus 52.2 after slippage too. The toll was bigger than the edge, and the sign flipped.

A taxi meter

Picture a taxi meter reading 1.5 before the wheels have turned. The flag fall is the spread, 0.9 pips the moment you sit down; the two kerbs are the slippage, 0.3 getting in and 0.3 getting out, as example figures for a quiet hour on the euro. The meter reads the same whether the ride makes money or not, and it runs on every ride, so a hundred and thirty-five rides is 202.5 pips of meter before a single pip of fare. A backtest that leaves the meter out has the passenger riding for free, and the driver's takings are not what the sheet says.

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