Zero edge, 8% target, 10% max loss: a 56% pass rate that falls to 17% with 0.1R costs

[Fairman]

Zero edge, 8% target, 10% max loss: a 56% pass rate that falls to 17% with 0.1R costs

Here's a pass probability calculation for a trader with no edge at all, because it shows what the rules do by themselves.

Set it up like this. Each trade risks 1% of the starting balance and either wins 1% or loses 1%, equal odds. The evaluation is passed at +8% and failed at minus 10%. That's a gambler's ruin problem, and the chance of reaching +8 before minus 10 is 10 / (8 + 10) = 55.6%. So a coin flipper passes more than half the time. On average it takes about 80 trades.

Now charge a cost of 0.1R per trade, which is 0.1% of the account. That's about 1 pip of spread and commission on a 10 pip stop. A win becomes +0.9% and a loss minus 1.1%. I ran the exact probabilities with a short script instead of a simulation: the pass rate drops from 55.6% to 16.7%. A tenth of a percent a trade cuts the pass rate by two thirds.

Add a limit of 60 trades, as a stand-in for a time limit. Without costs the pass rate is 30.5%. With costs it's 10.4%. At 100 trades it's 42.1% and 13.8%.

There's no edge anywhere in this, so a real trader should do better than these numbers. But the gap between 56% and 17% shows what costs do inside a narrow rule set, and it's why spread and commission belong in the plan before the strategy does.

[Fairman]

A real edge helps, but it also needs to pay the cost. Take 45% wins at 1.5R, which is an expectancy of 0.45 x 1.5 minus 0.55 = 0.125R per trade before costs. With the same 60 trade cap, the exact pass rate is 65.1% with no cost. Charge 0.1R a trade, so wins are +1.4R and losses minus 1.1R, and the net edge is 0.025R: the pass rate falls to 42.8%. With no cap on trades the figures are 85.4% and 62.5%. So the cost removes about a fifth of the pass rate even for a trader with a real edge.

[Fairman]

The same calculation tells you how sensitive the pass rate is to cost. With zero edge and no time limit, the pass rate is 55.6% at no cost, 46.0% at 0.02R per trade, 32.9% at 0.05R and 16.7% at 0.1R. So half a pip of cost per trade on a 10 pip stop, which is 0.05R, takes about 23 points off. Many traders see spread as a small number. Inside a pass or fail rule with fixed small steps it's one of the largest terms, and a cheaper account can matter more than a better entry.

[Fairman]

A use for these numbers is as a floor. If you can't beat the zero edge pass rate with costs included, your trades aren't adding anything over a coin flip. A rough way to test it: take your last 200 trades in R, include the costs you actually paid, and draw random sequences of 80 trades from them, with the 1% risk, an 8% target and a 10% floor. Count how often the target is reached first. If you get a rate near 17% or lower with costs counted, there's no measurable edge in the list yet, and the first thing to check is the cost per trade.

[Fairman]

Trade frequency matters too. The expected number of trades to finish was about 80 with no costs, and fewer with costs because failure comes quicker. A trader making 8 trades a day finishes in 10 days on average, and one making 2 trades a day takes 40. If the time limit is 30 days, the slower trader runs out of time often, since the pass rate in 60 trades was only 30.5% without costs. So the number of trades you take per day sets how many chances the rules give you, and it interacts with how large the cost is.