Frictional Costs In Futures Trading by Jesse Wolff
If we could trade in a perfect, cost-free world, there would be
many more systems that would exhibit profitable return profiles.
But we don’t. So what can we do about frictional costs?
The futures market is not a zero-sum game, and
there is a level of friction — that is, cost — that
must be accurately reflected in the research
process and resulting profit/loss profile of any
system being developed. This cost will vary
depending on various factors, including the
contract size of the market traded, the trading
medium (electronic vs. floor brokers), the
frequency of trading, the type of order used, how
that order is placed in the market, the specific
trading strategy, the bid/offer spread, the time of
day, day of the week, brokers used, and skill of
the trader — and more. The list goes on.
When modeling a market or set of markets, you
must burden the system with conservative cost
assumptions at the outset before the parameter
selection process begins. These higher costs will
play a significant role in determining if a system
has potential and what the optimal parameters are.