Spread, slippage and liquidity: the hidden costs of trading

When people assess a strategy’s profitability, they think about commission. But every trade also carries two costs that never appear on the statement: the spread and slippage. For an active trader, they often weigh more than the commission itself.

The spread (bid-ask spread)

The spread is the gap between the best selling price (ask) and the best buying price (bid) in the order book. If the bid is 99.98 and the ask 100.02, buying and immediately selling loses 0.04, or 0.04% — before any commission.

The spread depends on liquidity: on BTC/USDT it is often a single tick, practically zero in percentage terms; on a small-cap coin or a thinly traded stock it can reach 0.5% or more.

Slippage

Slippage is the difference between the expected price and the actual fill price. It has two causes:

• Depth: a market order larger than the quantity at the best price eats through several book levels. The average fill price deteriorates.
• Speed: between the click and the fill, price moves. During a news release or a violent move the gap can be large, especially for stops (which become market orders).

Order-book example

A market buy of 5 units fills at 1.5 × 100.02 + 2 × 100.05 + 1.5 × 100.10, an average price of 100.056. Slippage versus the best ask is 0.036 per unit — almost another full spread on top.

The real cost of a round trip

Express it in R (as a share of your risk) to see its impact. With a stop 0.4% from price, 0.05% commission per side, a 0.02% spread and 0.03% slippage per side, total cost reaches about 0.18%, or roughly 0.45R per trade. A strategy making +0.3R per trade on paper loses money for real. It is the first trap of scalping, covered in our article on expectancy.

When liquidity disappears

• Nights and weekends in crypto: fewer participants, thinner books.
• Macro releases (inflation, jobs, rate decisions): market makers pull their orders seconds before, then price jumps.
• Stock-market opens: opening gaps and wide spreads in the first minutes.
• Small caps: a single large order can move price by several percent.

Reducing these costs

1. Favour liquid markets, where spread and slippage are minimal.
2. Enter with limit orders when urgency is not real (see order types): no spread, no slippage, lower maker fee.
3. Size to depth: check in the DOM that your order is only a small fraction of the liquidity on the first levels.
4. Avoid low-liquidity moments, or widen the stop and reduce size accordingly.
5. Widen your horizon: the bigger the target, the less fixed costs weigh in R.

The Bullmarket simulator charges different fees depending on order type, and the history shows each trade’s fees: you see right away how much they weigh on your net result. Slippage is not modelled there, so keep a safety margin when you go live.