The total costs associated with executing trades, which include commissions, spreads, slippage, and any other fees. These costs can significantly impact a strategy’s net performance. In backtesting, one should account for transaction costs to avoid overly optimistic results. For instance, a strategy that scalps 5 pips might be profitable on paper, but once a 2-pip spread and 1 pip of slippage are deducted per trade, the net may be only 2 pips – or negative after commissions. Including realistic transaction costs in simulations ensures the backtested profit is closer to what one might achieve in live trading.

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