Transaction Costs and the Paper Sharpe
Every backtest statistic so far has been about whether the edge is real. This section is about whether it is collectible. The first and most mechanical filter is transaction costs, and the discipline is to price them per unit of turnover so the conversion from gross to net is arithmetic rather than hope.
The cost stack
Spread. Crossing half the bid-ask spread on entry and exit is the unavoidable toll of demanding liquidity. It varies by orders of magnitude across assets: a fraction of a basis point in major FX and index futures, several basis points in liquid single stocks, tens or hundreds in small caps and credit.
Fees and commissions. Exchange, clearing and broker charges. Small per trade, linear in turnover, and the only part of the stack that is known exactly in advance.
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