Slippage in Backtesting: Why Your Strategy Looks Better Than It Is
Slippage is the gap between the price you expect and the price you actually get. Most backtests ignore it, which makes a losing strategy look like a winner.
- 01 Slippage is the difference between your expected price and your actual fill, driven by spreads, latency, and market impact.
- 02 Backtests that fill at the close or midpoint ignore real trading friction and overstate performance.
- 03 High-frequency and short-hold strategies are the most sensitive to slippage.
- 04 A strategy that only works with zero slippage is not a real edge.
- 05 Always test under a conservative cost assumption and measure how much edge remains.
In-depth analysis
A backtest assumes you trade at a clean price. Real markets do not work that way. The price moves between your decision and your fill. Spreads cost you on entry and exit. That gap is slippage, and it is one of the most common reasons a strategy that looks great on history fails forward.
Where slippage comes from
Slippage has a few sources. The bid-ask spread means you usually buy at the ask and sell at the bid, not at the midpoint. Latency means the price can move before your order reaches the market. Market impact means a large order can push the price against you, especially in thin or illiquid names. Add these up and the effect compounds over many trades.
Why ignoring it inflates results
High-frequency and short-hold strategies are hit hardest. If a strategy makes hundreds of small trades, even a fraction of a cent per share in slippage can erase the entire edge. A backtest that fills every order at the close, or at the midpoint, is not modeling a market you can actually trade. The result looks better than reality because the friction is missing.
How to account for it
You can model slippage as a fixed amount per trade, a percentage of price, or a function of volume and liquidity. None of these are perfect. The point is to stop assuming friction is zero. A strategy that survives a conservative slippage assumption is more credible than one that only works at ideal fills. Test it both ways and watch how much edge disappears.
What TRION adds
TRION was built around an honest validation sequence rather than a promise. It is a paper-only research and validation workstation: you describe a strategy idea in plain English, read the compiled logic line by line, and backtest it against real stored market data. When a metric cannot be computed honestly, TRION shows "N/A" instead of inventing a number.
TRION does not place real orders, does not connect to a broker, and does not promise profit. The current beta is simulation-only and paper-only. AI assists with drafting and explanation; it does not approve, activate, or execute anything. Humans make every decision.
Frequently asked questions
What is slippage in simple terms?
Slippage is the difference between the price you expected to trade at and the price you actually got. It is caused by spreads, delays, and the market moving while your order is placed.
How much slippage should I assume in a backtest?
There is no single right number. It depends on the asset, liquidity, and order size. The honest approach is to test a conservative assumption and see whether the strategy still holds an edge.
Does TRION model slippage?
TRION models slippage and trading costs in its simulations so paper results stay honest. TRION is paper-only and HOLD-only in beta, so these are simulated estimates, not real fills.
Sources & References
- [1] Investing Quiz: Test Your Investing Knowledge — U.S. Securities and Exchange Commission (Investor.gov)
TRION is a simulation-only, paper-only research and validation workstation. It is not a broker, exchange, investment adviser, or live trading system, and it does not provide investment, financial, legal, or tax advice. Trading and investing involve substantial risk of loss. Backtests and simulations are based on historical data and assumptions and are not guarantees of future results. Reviewed by TRION Research.