Transaction cost
What does it really cost to trade, and why can a profitable backtest turn into a losing strategy once those costs are added?
In plain words
A transaction cost is everything a trader pays to enter and exit a position: the fee, the spread between bid and ask, and the price impact, the distance a trade moves the market against the trader. A backtest that ignores these charges reports a profit the market would not have delivered.
Why it matters
Costs are paid on every trade, so they accumulate with turnover. A strategy that trades often can show a small edge per trade that vanishes once fees and impact are subtracted. Thin markets make this worse, because a large order moves the price more than the same order in a deep market.
In a real week: BTC, week of 5 November 2018
In the week of 5 November 2018, BTC opened at 6485.85 and closed at 6449.81, a return of -0.56%, inside a 4.09% weekly range. Dollar volume was 0.49bn, below its prior 12-week average. A backtest assuming fills at the week's exact open and close would record that -0.56% as its result, while a real trader in this thin week would likely have paid fees and some price impact on top of it, though the data contains no fee or spread figures to size those costs.
A common mistake
Assuming zero-cost fills at the candle's closing price. Real orders cross the spread and often move the market, and those effects compound across frequent trades.