Ask any systematic trader what killed their backtest and nine times out of ten the answer isn't the signal — it's the gap between the price they expected and the price they actually got. Execution slippage is unglamorous, invisible in most backtests, and absolutely lethal to strategies running on lower-liquidity ASX mid-cap names. It's also genuinely hard to estimate before you've traded it live, which is exactly why it deserves serious attention.

The direct answer: on ASX mid-cap names — think market caps between $300 million and $2 billion, average daily turnover under $5 million — empirical slippage costs for systematic strategies commonly run between 15 and 60 basis points per side. That's 30 to 120 bps round-trip before you've paid a cent of brokerage. A strategy backtesting at 18% annually can realistically deliver 10% or less once real execution costs are layered in. The spread alone on a thinly traded mid-cap can be 10–20 bps at the best of times.

CONCEPTSlippage = the difference between your expected fill price and your actual fill price — and on thin ASX names, it compounds fast.
WARNINGBacktests using closing prices assume perfect fills — this assumption is catastrophically optimistic for low-liquidity mid-caps.
KEY IDEAPosition sizing relative to average daily volume (ADV) is the single biggest lever controlling your slippage cost on the ASX.

Think of it like buying concert tickets. If there are 10,000 seats, buying two doesn't move the price. But if only 200 tickets are available and you want 40 of them, sellers notice — and they adjust accordingly. Market makers and participants on the ASX mid-cap tier behave identically. When your order represents more than 1–2% of a stock's average daily volume, you're signalling your presence, and the market will make you pay for urgency.

Slippage vs Order Size (ASX Mid-Cap)12080400Slippage (bps)0.5%1%2%5%Order Size as % of ADV~15bps~25bps~45bps~90bps

Practical modelling approaches traders use include the square-root market impact model, which estimates slippage as proportional to the square root of your participation rate — a handy rule of thumb that holds reasonably well for ASX conditions. Others build empirical cost curves by paper-trading or using small live positions to calibrate before scaling. The core resources worth studying are Investopedia's slippage explainer, the mechanics behind market impact on Wikipedia, and Investopedia's liquidity breakdown — all of which give solid conceptual grounding before you start building your own cost model.

The practical takeaway you can use today: cap each position at no more than 10% of that stock's average daily volume, apply a minimum 30 bps per-side slippage haircut in your backtester for any ASX name under $5M daily turnover, and watch your strategy rankings change dramatically.

A backtest without realistic slippage isn't a strategy — it's a fantasy novel with good graphics.

This content is for educational purposes only and does not constitute financial product advice. Past performance is not indicative of future results. Profit Logic Ltd (ACN 688 669 936) accepts no responsibility for errors or omissions in this content or anywhere on this website. Always seek advice from a licensed financial adviser before making investment decisions.