What is “Strategy Review” and why costs matter
Strategy Review is a structured check of how a trading strategy performs, using the relevant inputs from a defined time period. In practice, it compares what happened (execution and results) against what the strategy assumed (entry, exit, and risk logic). Costs matter because they reduce net performance and can also change the way the strategy behaves in real execution.
A key idea is to separate stable mechanics from variable conditions.
- Stable mechanics are the parts you can define consistently: how you measure trades, how you calculate net results from recorded fills, and how you document assumptions.
- Variable conditions are market and operational factors that can change: spread size, order execution quality, and any provider-imposed fees.
Which costs affect Strategy Review
Costs that affect Strategy Review usually fall into two groups: direct costs and indirect costs.
Direct costs (measurable at the time of the trade)
Direct costs are explicitly charged or directly observable in pricing.
- Spread cost: the difference between the buy and sell prices. If your review uses mid prices instead of actual fills, the spread can be understated.
- Commissions and per-trade fees: charges that apply whenever a transaction happens.
- Financing or carry-related charges (when applicable): some markets or contract types can include ongoing costs tied to holding positions.
In a review, direct costs should be reflected in net outcomes using the exact price you were filled at and the exact fees recorded for those fills.
Indirect costs (arise from execution quality and frictions)
Indirect costs are not always shown as a single line item, but they affect the economic outcome.
- Slippage: the difference between the intended execution price (often based on a signal time or quote) and the actual fill price.
- Execution delay and partial fills: orders may be filled later than expected or in multiple parts, changing the realized average entry/exit.
- Cost changes across market regimes: spread and execution quality can widen or deteriorate during volatility, which can make a strategy’s realized behavior different from backtest assumptions.
Evidence and examples you can verify
Because no real-time data is assumed here, the verification approach focuses on what you can check in your own review dataset.
Example: netting out costs from recorded fills (with stated assumptions)
Assume you review 100 trades over one period and you have for each trade:
- filled entry and exit prices
- quantity
- recorded commission/fee totals
- timestamps
To verify that costs are incorporated, you can compute net profit per trade using only these recorded fill prices and the recorded fees. If your computed net results differ from your review’s “net” column, that signals a mismatch: for example, the review might be using mid prices instead of fills, or fees might be missing.
Example: slippage consistency check (with assumptions)
Assume you also stored an intended price for each trade (for example, the last quoted price at the decision time). You can verify slippage by comparing intended vs. filled prices.
- If the distribution of slippage is stable, the strategy’s review assumptions may be closer to reality.
- If slippage varies sharply, your review should treat execution as a variable factor, not a fixed input.
Limitations and failure modes
At least one material limitation is that costs are time-dependent.
- Cost levels can change between backtest and live execution, even if your strategy logic remains unchanged.
- Historical relationships do not establish future results: a cost pattern seen in one period may not hold later.
Other failure modes include:
- Incomplete cost capture: reviews that ignore commissions, fees, or financing charges will overstate net performance.
- Incorrect price reference: mixing intended prices (quotes) with filled prices leads to misleading net results.
- Regime mismatch: using one “average” spread or slippage hides the effect of wider spreads during volatile conditions.
Verification and the next question to ask
To verify the relevant facts independently, ensure your Strategy Review uses:
- recorded execution data (actual fills) rather than only quotes
- fee information available for the same account and period
- a clear definition of how net outcomes are calculated
A useful next question is: “Which cost items are explicitly included in my net calculation, and which are only implied?