Spread, slippage and the real cost of trading
Every trade pays a toll before it has a chance to be right. Participants who do not measure that toll tend to discover it in their results.
A trading idea is tested twice. Once against the market, where it may or may not have an edge, and once against the costs of expressing it, which are certain. The second test is lost more often than the first, and it is lost quietly.
The spread
The difference between the price at which an instrument can be bought and the price at which it can be sold is paid on every round trip, without exception. On a liquid instrument at its busiest hours it may be a fraction of a point. That fraction multiplied by a hundred trades a month is no longer a fraction. The more frequently a strategy trades, the larger the edge it needs just to cover the toll, and many strategies that look attractive before costs are simply transferring money to the venue.
Slippage
Slippage is the gap between the price a participant intended and the price they received. It is small on resting orders in quiet markets and large on market orders in fast ones. Stop orders, which are by design triggered when the market is moving against the position, are the orders most exposed to it. Stops fill worse than requested a meaningful share of the time, and worse still around economic releases and the open.
Slippage is also where simulated results and real results part company. A simulator that fills every order at the intended price is not modelling a market; it is modelling a wish.
Speed is rarely an edge
Participants sometimes conclude that the answer to slippage is speed. For most, it is not. The fastest participants in modern markets operate in microseconds from inside the exchange's own building, and no strategy run over an internet connection competes with them. A strategy that only works if it is executed instantly is a strategy that will not work. The useful test is the opposite one: does the idea still hold if execution is a little late? If it does not, the edge was never really there.
Measure it
The only cure for costs is to know them. That means comparing the price that was expected with the price that was received, over enough trades for the difference to mean something. That difference is the true cost of a strategy, and it belongs in every evaluation of whether the strategy should exist.
The cheapest trade is the one not taken. The second cheapest is the one whose costs were counted first.