Strategy capacity: the point where size ruins the edge

[Amanhasnoname]

A scalping edge that works at 1 lot may not work at 20. As size grows, slippage, partial fills, and market impact increase. At some size, the edge disappears. That size is the strategy's capacity.

Estimating capacity requires measuring cost as a function of size. Run trades at several sizes and compute the average slippage and spread cost. Combined with the edge, the net profit per trade at each size shows where it turns to zero.

Capacity depends on liquidity, which varies by pair and time of day. A strategy limited to quiet hours has lower capacity than one that trades during the overlap.

Also consider the effect of the strategy's own flow on the price. On thin pairs, a trader's orders can move the market against themselves.

For retail traders, capacity is usually not binding on majors but can be on crosses and exotics. Brokers may also restrict large sizes through execution policies.

Knowing the capacity prevents overestimating how much can be scaled.

At what order size does the average cost per trade start to rise sharply on the pairs traded?