There is a particular kind of pain reserved for systematic traders: watching a strategy that crushed your backtest slowly bleed out in live markets. No dramatic crash, no obvious bug — just a quiet, persistent underperformance that makes you question everything. Transaction cost modelling errors are the silent assassin behind more blown strategies than most traders want to admit.

The frustrating part is how invisible these errors are during development. Your backtest shows 35% annual returns. Live trading delivers 8%. The difference rarely lives in your signal logic — it lives in the gap between the costs you assumed and the costs you actually paid. Getting this wrong is embarrassingly easy, and almost everyone does it at least once.

CONCEPTTransaction costs in live trading include spread, slippage, market impact, borrow costs, and exchange fees — most backtests only model one or two of these.
WARNINGAssuming fills at the mid-price in your backtest is one of the most common and costly modelling mistakes a systematic trader can make.
KEY IDEAA strategy with a high trade frequency needs a drastically more accurate cost model — small per-trade errors compound into catastrophic annual drag.

Think of it like budgeting for a road trip using only the cost of petrol, then forgetting tolls, parking, tyres and a speeding fine outside Dubbo. Each item feels minor in isolation. Together they blow your budget entirely. Transaction costs work the same way — spread assumptions, slippage estimates, market impact on larger orders, financing costs on leveraged positions, and brokerage fees all stack up, especially when you are trading hundreds of times per month.

Assumed vs Actual Cost Per Trade (bps)051015SpreadSlippageMkt ImpactBrokerageAssumedActual

The most dangerous error is modelling slippage as zero or as a flat fixed number. In reality, slippage scales with order size relative to average daily volume and widens dramatically in volatile conditions — exactly when your strategy may trade most aggressively. A high-frequency mean reversion strategy might look brilliant at two basis points of assumed cost and be a money furnace at six. The math is brutal and unforgiving. Rigorous cost modelling requires treating slippage as a dynamic variable, understanding market impact as a function of your order size versus liquidity, and accounting for every layer of cost including the often-overlooked bid-ask spread at the actual time of execution rather than at the close.

The practical takeaway is simple: before you trust any backtest, stress-test it by doubling your assumed transaction costs. If the strategy dies, it was never real to begin with.

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.