Slippage & Transaction Costs

Slippage & Transaction Costs

Real trading incurs costs that reduce profitability. Two major sources are:

Slippage

Slippage is the difference between the expected price and the actual execution price. When buying, you pay slightly more; when selling, you receive slightly less.

effective_price = price * (1 + direction * slippage)

• direction = 1 for a buy (price goes up slightly)
• direction = -1 for a sell (price goes down slightly)

Net Return

After accounting for trading costs (spread, commission, etc.), the net return is simply:

net_return = gross_return - trade_cost_pct

Task

Implement:

• apply_slippage(price, direction, slippage=0.001) — returns the effective execution price
• net_return(gross_return, trade_cost_pct) — returns the return after costs