It depends on the trading system and the markets that you are trading. The primary principle is to have a level of slippage and commissions in your backtest that represent what you would get in real life. So if you had a system that traded Australian small-cap minors and they were stocks that were all under 5-10 cents which were turning over a couple hundred thousand dollars a day on average. The amount of commissions and slippage you should include in your backtest is way more than if you’re trading a mean reversion system on the spy ETF in the US. How much would I reasonably expect to get if I followed these rules in this universe? And it could be from as little as nothing more than the commission you pay to the broker which is 0.08% to 0.1%. Or it could be a couple of percent in the case of a small cap system and somewhere in between.
With your liquidity filter, the higher the liquidity requirement for the system, the lower the slippage you’re likely to get. If you’re trading trend following and your daily turnover requirement is $250,000, you might want 0.75% or 1% slippage in commission. For example, if you’re liquid requirement is $2 million a day, then it could be as little as a quarter of a percent or 0.2.
Monitor the slippage you’re getting on your trades and use that to inform yourself. My final principle is that I always like to overestimate it in the backtest. Because I don’t want to design a system and then have that system collapse or be much worse than I expected because the commission is higher than expected.
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