Costs in a backtest

A backtest with free trading flatters any rule that trades often. Ours charges a cost on every trade unless you switch it off, and says clearly when it is off.

What is charged#

• Each trade pays a number of basis points of the amount bought or sold. One basis point is 0.01%.
• The default is 10 basis points, which is 0.10% of each trade. In the backtester you can set it anywhere from 0 to 200.
• The cost is taken from the portfolio at the moment of the trade, so it compounds.
• The page shows the total drag: how much of the portfolio costs consumed over the whole test.

What is not charged#

• Taxes. Frequent rebalancing in a taxable account turns gains into short-term gains. This can be larger than every other cost combined and depends entirely on you.
• Wider bid-ask spreads on small or thinly traded stocks. Ten basis points is reasonable for large US stocks and optimistic for small ones.
• Price impact. A large order moves the price against itself.
• Interest on cash. Empty slots sit in cash at 0%. Real cash would have earned a little, so this one works against the strategy.

The comparison line pays nothing#

SPY is bought once and held, so it has almost no trades to charge. Its own fund fee is already in its price. This is fair: it is what holding the index would really have cost.