forex-scalping.com

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.

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.

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.

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.

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.