The strategy was printing. Forty-three trades in a month, win rate above sixty percent, and I was watching the equity curve climb with the quiet satisfaction of someone who thinks they've finally cracked it. Then the brokerage statement arrived. Net P&L: negative. Not slightly negative. Embarrassingly, undeniably, go-explain-this-to-your-wife negative.

I'd been trading a mean-reversion setup on ASX small caps — tight ranges, quick exits, small per-trade gains by design. The logic was sound. The volume was the problem. Each trade carried a brokerage fee, a spread cost, and on thinly traded stocks, measurable market impact. I hadn't modelled any of it. I'd backtested price. Not cost.

CONCEPTGross return is vanity. Net return after all transaction costs is the only number that matters.
WARNINGHigh-frequency strategies can show strong win rates while quietly haemorrhaging capital to fees and spreads.
KEY IDEAIf your edge is smaller than your all-in transaction cost, you don't have an edge — you have an expensive hobby.

The brutal maths: average gross profit per trade was $47. Average all-in cost — brokerage both sides, spread, and slippage — was $61. I was running a business where every sale lost money and I was trying to make it up in volume. Classic. The strategy needed either fewer trades, larger position sizing, or a completely different instrument with tighter spreads.

Gross Profit vs Transaction Cost Per TradeAvg GrossProfit $47All-In Cost$61Cost exceedsgross profit$80$40$0

The root cause wasn't greed. It was a backtesting methodology that treated execution as frictionless. I'd read about transaction costs and understood them conceptually, the same way you understand cholesterol — abstractly, and not as your immediate problem. The fix required modelling bid-ask spread and slippage into every historical simulation, then stress-testing against what market impact does to fill quality at scale. The rule I wrote in my journal that night: never backtest a strategy without a cost model that matches live execution conditions exactly.

The strategy wasn't broken. The measurement was. Fix the measurement before you risk the capital.

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