Market conditions and costs
Costs
Spread, commission and overnight swap come out of every trade, and they weigh more on small stops.
Arithmetic
True by construction. No market data is needed to know it.
Arithmetic. The candlestick tests found that gross gains did not survive costs.
What it is
The cost of a trade as a share of the risk is the spread divided by the stop. One pip of spread is 5% of a 20 pip stop and 1% of a 100 pip stop.
What it suggests
Patterns that look profitable before costs often are not after them, which is the main finding of the candlestick tests.
How to check it
Enter costs when judging a plan and prefer stops that are large compared with the spread.
Common mistakes
- Testing an idea without costs.
Sources
- Duvinage, Mazza and Petitjean (2013), The intra-day performance of market timing strategies and trading systems based on Japanese candlesticks, Quantitative Finance 13(7) (abstract or primary page read)
- Orquin-Serrano (2020), Predictive power of adaptive candlestick patterns in forex market: EURUSD case, Mathematics 8(5) (abstract or primary page read)
Related lessons
Written in our own words. Education only, not financial advice.