A backtest can remain statistically attractive while becoming economically untradeable at the proposed capital. Spreads, fees, delay and size-dependent execution costs consume a strategy's gross edge. Building on market impact, this lesson writes a consistent trading-cost budget, distinguishes average profitability from the value of the next unit of size, and treats capacity as a conditional decision rather than a permanent property of a signal.
Learning objectives. By the end of this note you should be able to:
- define a cost budget without double counting spread and slippage;
- convert between currency, per-share and basis-point costs;
- derive a simple marginal size limit;
- connect turnover to portfolio cost drag;
- stress a cost forecast outside normal liquidity conditions.
In this lesson
- Establish the accounting boundary
- A transparent size decision
- Turnover converts small costs into material drag
- Condition on the proposed implementation
- Stress the constraint, not only the coefficient
Before you start
The full lesson, with worked examples and exercise solutions, is for members.
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