Why your backtest looks better than reality
Survivorship bias, look-ahead bias and overfitting each inflate backtested returns in ways that vanish in live trading. What each one is, how it creeps in, and how to test for it.
4 min read
Screener · 24 June 2026
What a trade actually costs in India: brokerage, STT, GST and slippage
Zero-brokerage is not zero-cost. A full breakdown of every charge on an Indian equity trade, why slippage usually exceeds the visible fees, and what it does to a high-frequency strategy.
3 min read
A strategy that looks profitable before costs and unprofitable after them is not a marginal case – it is the normal case. Costs are where most backtested edges go to die, and they are systematically underestimated because several of them are invisible on the contract note.
The visible charges
These appear on your contract note and are straightforward to model. Rates change with regulation, so treat the structure as durable and the numbers as needing a check against current circulars.
| Charge | Applies to | Basis |
|---|---|---|
| Brokerage | Both legs | Flat fee or percentage, per broker |
| Securities Transaction Tax | Sell leg (intraday); both (delivery) | Percentage of turnover |
| Exchange transaction charge | Both legs | Percentage of turnover |
| GST | Brokerage + transaction charges | 18% of those components |
| SEBI turnover fee | Both legs | Percentage of turnover |
| Stamp duty | Buy leg | Percentage of turnover |
| DP charge | Sell leg (delivery only) | Flat, per scrip per day |
The invisible charge: slippage
Slippage is the gap between the price your strategy assumed and the price you were filled at. It never appears on a statement, and for anything trading frequently or in size it is usually the largest cost of all.
- Bid-ask spread – crossing the spread costs half of it on entry and half on exit, before any market movement.
- Market impact – a large order moves the price against itself as it consumes the book.
- Latency – the gap between signal and fill, during which the price moves.
- Partial fills – the liquid part of your order executes; the rest fills worse, or not at all.
Worked example: a strategy trading daily
A strategy holds positions for one day, turning over its capital once each session – roughly 250 round trips a year. Suppose visible costs total 0.05% per round trip and slippage adds 0.10%, for 0.15% all-in.
Annual cost drag = 0.15% × 250 = 37.5%The strategy must clear roughly 37.5 percentage points of gross return each year merely to break even. A backtest showing 25% gross is a losing strategy, and no amount of parameter tuning changes that – it is arithmetic, not optimisation.
| Holding period | Round trips/year | Annual cost drag |
|---|---|---|
| 1 day | ~250 | 37.5% |
| 1 week | ~50 | 7.5% |
| 1 month | ~12 | 1.8% |
| 1 year | 1 | 0.15% |
This is the clearest argument for holding period as a first-class design decision rather than an afterthought. The same signal, the same costs, and a hundredfold difference in cost drag.
Modelling costs honestly
- 01Apply costs to every leg, in the backtest, at the moment of the trade – not as an annual haircut subtracted at the end.
- 02Assume you cross the spread. Assuming mid-price fills quietly assumes a counterparty who did not exist.
- 03Scale slippage with order size relative to typical traded volume. A fixed basis-point assumption flatters large orders in thin names.
- 04Re-run the strategy at two and three times your slippage estimate. If the edge does not survive, it was never robust enough to trade.
Common questions
- Is zero-brokerage really free?
- No. Brokerage is one line among seven. STT, exchange charges, GST, stamp duty, SEBI fees and DP charges remain, and slippage – typically the largest cost for an active strategy – is unaffected by what a broker charges.
- How much slippage should I assume in a backtest?
- It depends on the instrument's liquidity and your order size, so no single figure is right. The useful discipline is to test at several multiples of your estimate: an edge that only survives at your most optimistic assumption is not an edge you can rely on.
- Why does STT differ between intraday and delivery?
- The rate and the leg it applies to are set differently for intraday and delivery segments. Because delivery attracts it on both legs, holding period changes both how often you pay costs and how much you pay each time.
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