Execution cost has three parts. The spread is the gap between bid and ask, paid on every round trip. Depth is how much resting volume sits at and near the best prices; an order larger than the best level fills through worse ones, and that cost is market impact. Slippage is the difference between the expected fill and the actual one, and it grows where depth is thin — at news, at the rollover, in thin hours. A setup's edge is what remains after all three, which is why a backtest filled at the mid overstates it.
Execution cost is what a trade pays beyond the mid price, and it has three parts: the spread, which is always paid; market impact, which is paid when an order is larger than the best level; and slippage, which is the gap between the fill that was expected and the fill that happened. A setup’s edge is what is left after all three.
Part 1 drew the book and Part 2 placed orders in it. This part puts a price on being there — the price the earlier levels called “costs” in one word, now separated into the three things it is.
Three costs on one trade
Take one round trip: in, and out. Between the mid price at entry and the mid price at exit lies whatever the market did. Between the mid and the fills lies the cost.
The spread is the gap between bid and ask at the moment of the trade. It is visible in the quote, it is paid by whichever side crosses, and a round trip crosses twice. CFD Foundations counted it; Part 1 explained it.
Market impact is the cost of an order larger than the volume at the best price. It takes the best level and walks to the next, and its average fill is worse than the quote by the distance walked.
Slippage is the difference between the price an order was expected to fill at and the price it did. Foundations defined it; this part explains where it comes from — the book changing between the decision and the fill, or being too thin to absorb the order at the quote.
The first is a fact about the quote. The second is a fact about size. The third is a fact about time.
Depth: the same order in two books
Depth of market is the resting volume at each price near the touch, both sides. It is the thing the quote does not show and the thing that decides whether the quote is available for any particular size.
Depth is why “the spread is two pips” is an incomplete statement. It is two pips for the volume at the touch. For a retail-sized order in a major pair during London that is nearly always enough and impact is nearly always zero. For the same order at 03:00, in a cross, or on a CFD whose underlying is illiquid, it is not — and the cost appears not as a wider quoted spread but as a fill a level or two past it.
The tick-volume rhythm the Intermediate level drew is, underneath, a depth rhythm: participation by hour is resting volume by hour.
Slippage: the cost of the hour
Slippage is measured after the fact, and it has a clock.
The mechanism is Part 2’s: a stop is a market order sent when its trigger is reached, and it fills at the next available price. In the overlap the next available price is at the touch. In the rollover hour, when providers withdraw quotes and the book is briefly a fraction of itself, it is not. In the minute after a release it may be many pips away, because the book that existed before the number has been pulled and re-priced.
None of the bars carries a number, deliberately. Slippage is a property of one broker’s feed at one hour on one instrument, and the only honest figure is the one measured on the account that will pay it — which is what the forward test is for. What can be said in general is the ordering, and the ordering is enough to keep a stop out of the windows where it is worst.
Key takeaway The spread is a price. Impact is a function of size. Slippage is a function of time. A setup that trades small, in liquid hours, on a major pair pays almost only the first. A setup that trades size, or thin hours, or thin instruments, pays all three — and its replay does not know.
Depth of Market on the platform
MetaTrader 5 has a Depth of Market window, and it is worth knowing exactly what it shows. Its documentation says it displays bids and asks at the best prices, closest to the market; that the number of levels shown is set by the broker’s symbol parameters; and that availability for exchange instruments depends on the broker.
So the window is a genuine read of depth on an index or stock CFD whose underlying is exchange-traded and whose feed the broker carries. On a currency pair it is the broker’s ladder from Part 1 — the dealer’s book, assembled from providers — and what it says about depth is what the broker’s book says, not what the market’s would. Both are useful. They are not the same measurement, and Part 7 is about the difference.
The cost line in the record
Everything above has one consequence for the Intermediate level’s last part. A replay that fills every trade at the mid — the chart’s line — has paid no spread, no impact and no slippage. Its expectancy is the setup’s edge before execution.
The correction is mechanical. Every replayed trade is charged the spread at the hour it would have traded — not the average spread, the spread then. Every trade whose size is large against the instrument’s depth is charged an estimate of impact, and the estimate is revised from the live fills. And slippage is taken from the forward test, per window, because it cannot be taken from anywhere else.
What survives that correction is the setup’s edge. What does not survive it was never an edge; it was the mid price, which no one has ever traded at.
Next: How a CFD price is formed — liquidity providers, aggregation, mark-up and last look: the pipeline behind the quote on the ticket.
- The spread is paid on every round trip; a strategy's average trade has to clear it before it has an edge.
- Depth is the resting volume at and near the best prices; an order larger than the best level fills through worse ones.
- Slippage is the gap between the expected fill and the actual fill, and it widens where depth thins.
- Depth of Market in MetaTrader 5 shows the resting bids and asks nearest the market where the broker provides it; on OTC instruments the quotes are the broker's.
- A backtest filled at the mid price overstates the edge by the spread plus the average slippage.
