Published 2026-10-14
Transaction cost
Transaction cost is the total cost of making a trade — commission, spread and slippage together. Ignoring it is the quietest way to turn a losing rule into a winning backtest.
What it is
Transaction cost is the total cost of making a trade — commission, bid-ask spread, and slippage, taken together.
Why it is the quietest error
Costs are invisible unless stated. A backtest with no cost model is not optimistic by accident — it is optimistic by omission, and that is harder to spot.
Three components, three ways to understate:
| Component | Understated as |
|---|---|
| Commission | Zero, or a rate that no longer exists |
| Spread | Assumed zero on illiquid names |
| Slippage | A number chosen to make the result work |
The rule that trades most pays most — and looks best when costs are left out. (See turnover.)
How to check
Ask for the cost model in numbers. If it is not there, the result is pre-cost — and pre-cost results are not results.