Hi everyone,
I’m testing an AI factor weekly-rebalanced long-only P123 small-cap strategy with:
The backtest looks very strong, but I’m concerned about live execution.
Question 1:
For those who have traded similar high-turnover weekly small-cap systems live, is 1,500%–2,000% annual turnover realistic, or do slippage, spreads, market impact, and missed fills usually kill the edge?
Question 2:
Is AvgDailyTot(20) > 10000 a realistic liquidity threshold for live small-cap trading, or is it too low? What minimum liquidity rule do you usually use relative to account size or position size?
I’m mainly looking for practical feedback from people with live P123 small-cap trading experience.
I also want to give special thanks to Yuval and Andreas. Their ideas and guidance were very helpful in designing this strategy.
Thanks.
Hi and welcome to the community!
Here are a few first impressions based on the information provided:
On slippage: 0.1% fixed is likely too optimistic for a weekly small-cap strategy at this turnover level. Running the same backtest with P123's variable slippage would give you a more realistic picture — it can be significantly more punitive depending on the liquidity tier of each position.
On the liquidity threshold: AvgDailyTot(20) > 10,000 needs to be evaluated relative to your largest position size, which depends directly on your max position constraint in the dynamic weighting and your total portfolio size. Without knowing these, it's hard to say if 10K is sufficient — but it could easily be too low.
On turnover: 1,750% annually on weekly small-cap rebalancing is very high. In live trading, the combination of spreads, partial fills, and real slippage on the less liquid names tends to erode a significant portion of the backtested edge.
Thanks for the feedback. I reran the same strategy using variable slippage instead of the fixed.So yes, variable slippage seems to completely destroy the edge.
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Variable slippage is as high as 5% for stocks with daily dollar volume less than $50,000. I would change your minimum from $10,000 to $50,000 and then try variable slippage. And yes, that kind of turnover is pretty insane.
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Thanks for your reply, Yuval — our P123 legend!
I increased the minimum liquidity threshold to $50,000. I also changed the sell rules to GainPct > 50 OR NoDays > 90 to reduce turnover. Previously, the sell rules were Close(0) < SMA(10) OR NoDays > 30.
I also increased the number of positions to 50 and changed the sell rules, which improved the results and reduced turnover.
