Liquidity and market impact

Displayed volume, spread, and recent trade activity are snapshots. Liquidity can disappear during releases, session transitions, gaps, or a sudden change in risk appetite. A fill model based on calm conditions can underestimate real execution cost.

The relevant question is whether the desired order can be executed at the intended size and speed under the strategy's actual trading windows.

Large orders relative to available liquidity can move the price or receive multiple fills. Even smaller orders can face a different spread or queue position during a fast event. Measure cost and fill quality at the size you plan to use, not only at the tester's abstract one-lot result.

If increasing size worsens fills faster than it increases expected return, the strategy has a capacity limit. Capacity is not a marketing number; it is an empirical relationship between size, execution, and outcome.

A lower risk setting that preserves execution quality may produce a better real result than a larger setting that overwhelms the market conditions it was tested on.