Did you just run the numbers—backtest profit factor 1.8, but after fees and slippage only 1.2? It feels like someone quietly took money out of your account.
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Don't rush to kill the strategy. Fees eating into profit is normal. The key is how much is left after costs, and how to get some of it back. Three steps will give you a clear answer.
Step 1: Calculate Your Net Profit Factor
[What to do]: Take your backtest or raw trade records, subtract all real friction costs, and recalculate the profit factor.
[How to do it]: Add two columns to your spreadsheet:
"Gross Profit": your originally recorded profit or loss
"Trading Cost": fees + slippage + funding rates (if you hold positions overnight)
For each trade, Net Profit = Gross Profit - Trading Cost. After updating all trades, calculate the net profit factor: Total Net Profit ÷ Total Net Loss.
Exchange fee rates for reference (source: public platform documentation):
Binance Futures: Maker 0.02%, Taker 0.04%
OKX Futures: Maker 0.02%, Taker 0.05%
Bybit Futures: Maker 0.01%, Taker 0.06%
High-frequency traders, take note: if your annual turnover exceeds 400%, fees may eat up all strategy returns, and your net profit factor will approach 1 or even drop below 1.
[Done when]: You have a table with "Gross Profit Factor" on the left and "Net Profit Factor" on the right. The gap between the two numbers is your cost loss.
Step 2: Decide Based on Net Results—Keep or Kill
[What to do]: Compare your net profit factor against benchmarks to judge whether the strategy is still worth running.
Judgment criteria:
| Net Profit Factor | Conclusion | Next Step |
|---|---|---|
| ≥ 1.5 | Strategy is healthy | Keep running, but keep monitoring cost ratio |
| 1.2 - 1.5 | Barely runnable, but risky | Go to Step 3 and find ways to cut costs |
| < 1.2 | Will lose money in live trading | Pause trading, optimize the strategy or reduce frequency first |
Risk reminder: Cost is the enemy of compounding. A strategy with a gross profit factor of 1.8 may end up with a net profit factor of only 1.2 after 2-3% annual trading costs. Meanwhile, a strategy with a gross profit factor of 1.5 but costs of only 0.5% can still maintain a net profit factor above 1.4. Which one is more worth running? Obviously the latter.
Step 3: If Net Results Look Bad, Try These Three Fixes Before Giving Up
[What to do]: Don't kill the strategy immediately. First try reducing friction costs to see if you can pull the net profit factor back up.
Three ways to cut costs:
Reduce trading frequency: A weekly rebalancing strategy can have turnover as high as 400-600%, and net returns get swallowed by costs. Lower the frequency to monthly or quarterly, and costs may drop by more than half while net returns actually improve.
Try to be a Maker: Use limit orders instead of market orders. Maker fees are usually 0.02-0.03% lower than Taker fees.
Trade liquid instruments only: Major coins (BTC/ETH) have much smaller slippage and spreads than altcoins. Run the same signal on major coins and costs drop immediately.
After making these three adjustments, redo the Step 1 calculation. If the net profit factor returns to 1.5 or above, the strategy itself is fine—your previous execution was just too expensive.
FAQ
Q: My strategy holds positions for a long time (days to weeks). Do fees still matter much? A: The impact is relatively small because trading frequency is low. But funding rates add up—with three settlements per day, holding for a week can cost 0.5-1%. If your strategy's annualized return is only 20%, funding fees alone could eat a quarter of it. You must include funding rates in the trading cost column.
Q: Is there a healthy benchmark for the fee-to-profit ratio? A: If total fees exceed 30% of net profit, it's dangerous. If you make 100 and fees cost 35, the strategy cannot withstand market fluctuations.
Q: How do I estimate slippage? I can't know exactly how much I slipped on each trade. A: In backtesting, use a fixed slippage model—add 0.02% per trade for major coins and 0.05-0.1% for altcoins. After going live, check the difference between "fill price vs signal price" in your trade records and update your model parameters accordingly.
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Next Steps
Open your trading journal today and recalculate the last month of trades using Step 1 to find your net profit factor.
If net profit factor ≥ 1.5: congratulations, the strategy survives cost pressure—keep running it.
If net profit factor is 1.2-1.5: don't give up yet. Apply the three fixes from Step 3 for a month, then recalculate.
If net profit factor < 1.2: pause live trading. Permanently add costs and slippage to your backtest and look for new signals.
