Does the spread belong in the stop distance when sizing a long? 1.25 lots against 1.08

[Fairman]

Does the spread belong in the stop distance when sizing a long? 1.25 lots against 1.08

EURUSD, $10,000 account, 1% risk, so $100. The chart, which draws the bid, shows 1.0850. The spread is 1.2 pips, so you buy at the ask, 1.08512. Your stop is 1.0842.

The distance on the chart is 8 pips, which gives 100 / (8 x 10) = 1.25 lots.

But a long enters at the ask and the stop triggers on the bid. The real distance from the fill to the stop is 1.08512 - 1.0842 = 9.2 pips. At 1.25 lots a stop out costs 9.2 x 1.25 x 10 = $115, or 1.15%.

Sizing from the true distance gives 100 / (9.2 x 10) = 1.087, so 1.08 lots, and the loss at the stop is $99.36, plus commission if there is one.

The error is 15%, from one spread. Over 100 trades it means about 15% more risk taken than planned. On a 5 pip stop with the same spread the true distance is 6.2 pips, and the understatement is 24%.

[FXS HongKong Scalper]

Including the spread in the stop distance is the correct approach, and it makes a meaningful difference on tight stops. For shorts the logic flips: entry at the bid and stop on the ask, so the spread again adds to the distance. A sizing script that reads the current spread and adds it automatically avoids this.

[PTScalper]

Does the spread belong in the stop distance when sizing a long? 1.25 lots against 1.08

EURUSD, $10,000 account, 1% risk, so $100. The chart, which draws the bid, shows 1.0850. The spread is 1.2 pips, so you buy at the ask, 1.08512. Your stop is 1.0842.

The distance on the chart is 8 pips, which gives 100 / (8 x 10) = 1.25 lots.

But a long enters at the ask and the stop triggers on the bid. The real distance from the fill to the stop is 1.08512 - 1.0842 = 9.2 pips. At 1.25 lots a stop out costs 9.2 x 1.25 x 10 = $115, or 1.15%.

Sizing from the true distance gives 100 / (9.2 x 10) = 1.087, so 1.08 lots, and the loss at the stop is $99.36, plus commission if there is one.

The error is 15%, from one spread. Over 100 trades it means about 15% more risk taken than planned. On a 5 pip stop with the same spread the true distance is 6.2 pips, and the understatement is 24%.

Hi Fairman,

good idea to write about.

From my point of view i work like this, if i want to open some position i will select level, where i will put my stop loss, it have to be safe place at first place.

After that i will calculate the position size and i do not care to be 100 percent correct to risk exact 1, 2 or 5 percent per that idea. Depends how i like that.

[Shadow Trader]

Exotic and thin crosses look attractive from a distance: big ranges, big candles, lots of pips. The first punishment is the spread. A 30 pip spread on a pair that moves 300 pips a day looks proportional, but a scalping target is rarely 300 pips, and hitting a 10 pip target means paying a third of it up front.

The second is the order flow. In a thin market, one mid-size order can move price several pips, then retrace. That bounce looks like a signal but is closer to the footprint of a single participant.

Sizing and timing end up set by the depth of the book and not by what the chart offers. Quotes can also stand still for seconds and then leap, with stops sitting inside the jump.

Has anyone found a way to make thin pairs work at scalping timeframes, or are they better left to longer holding periods?

[Fairman]

A short has the mirror image. You sell at the bid, and the stop is a buy that triggers on the ask. With a chart showing a bid of 1.0850 and a stop at 1.0858, the loss at the stop is 1.0858 - 1.0850 = 8 pips, because the entry is the bid you see. So the shorts have no extra pip hiding in them when you measure from the chart, while the longs do. It is easy to miss because the position sizer you use probably treats both the same. Check the sizer once on each side by hand, with a real quote, and see whether it uses bid, ask or the price you type in.

[Fairman]

The spread varies through the day, which makes the correction a moving target. At 0.2 pips in the London morning the long's distance is 8.2 and the size 1.22 lots. At 1.2 pips around the rollover it is 9.2 and 1.08. The simplest approach is to include the spread you actually see at the moment of entry, and the next simplest is to add a fixed allowance for your instrument, such as 0.5 pip on the majors during liquid hours. Whichever you choose, apply it the same way each time, so that the planned risk and the realised risk differ by a known, small amount.

[Fairman]

The error compounds when stops are tight. Take a 4 pip stop and a 1 pip spread. Chart distance 4 gives 100 / 40 = 2.5 lots. True distance is 5 pips, so the stop out costs 5 x 2.5 x 10 = $125, which is 1.25% on a planned 1%, an overshoot of 25%. Meanwhile with an 8 pip stop and the same spread the overshoot is 12.5%. The spread is a fixed number of pips, so it takes a bigger share of a smaller stop, and so scalpers using fixed percent sizing pay more risk than they think. Adding the spread to the distance fixes the lot size to 2.0 lots, and the loss at the stop is the planned $100.

[Fairman]

In MQL5 you can get the money loss straight from the platform. OrderCalcProfit takes an order type, symbol, volume, an open price and a close price, and returns the profit in account currency for that hypothetical trade. For a long, pass ORDER_TYPE_BUY, the current SYMBOL_ASK as the open price and your stop price as the close price. For a short, pass ORDER_TYPE_SELL with SYMBOL_BID as the open. The result is negative, and its size is the actual risk with the spread inside it, so you can scale the volume until it matches your 1% without any pip conversion of your own.

[gwhitlock64]

The result is negative, and its size is the actual risk with the spread inside it, so you can scale the volume until it matches your 1% without any pip conversion of your own.

Fairman, fair enough, but OrderCalcProfit is MQL5 only, so MT4 lot of us are stuck doing it by hand.

[Fairman]

Ha, fair, the MT4 crowd really did get the short end there. The by-hand version isn't bad though. For a long, your risk per lot is (entry ask minus stop, in pips, plus the exit spread if the stop is hit on the bid) times the pip value. With EURUSD at roughly 10 dollars per pip per lot, a 20 pip stop plus 1.2 pips spread is 21.2 pips, so 212 dollars per lot. On a 10,000 dollar account with 1% risk, that is 100 dollars, so about 0.47 lots. Without the spread you'd get 0.5 lots, and the gap grows quickly on a tight scalp stop.

On MT4 I'd put that into a tiny script or a spreadsheet that reads MarketInfo for MODE_TICKVALUE and MODE_SPREAD, so the maths isn't redone on every trade. Just keep in mind that tick value can differ on cross pairs and on metals.

Do you size from the ask or the bid when you place the stop? And do you pad it for slippage as well, or leave that out?