One step 10% target with 6% drawdown against two steps of 8% then 5%: zero edge pass odds

[Fairman]

One step 10% target with 6% drawdown against two steps of 8% then 5%: zero edge pass odds

Two evaluation designs, written the way many firms present them, with made-up round numbers. I'm not describing any particular firm.

Design 1: one step. Make +10% before losing 6%.
Design 2: two steps. Step one is +8% before losing 10%, and step two is +5% before losing 10%.

Take a trader with no edge who risks 1% a trade with equal odds. The chance of hitting +T before minus D is D / (T + D).

Design 1: 6 / 16 = 37.5%.
Design 2: step one is 10 / 18 = 55.6%, step two is 10 / 15 = 66.7%, and passing both is 0.556 x 0.667 = 37.0%.

So at zero edge and zero cost, they're the same, 37.5% against 37.0%. Looking at the headline numbers, the two step design with its smaller targets feels easier, and mathematically it isn't.

Now add a cost of 0.1R per trade, with wins of 0.9% and losses of 1.1%. Design 1 gives 9.3%. Design 2 gives 16.7% x 31.3% = 5.2%. The two step version falls further because the trader makes more trades in total, so the cost is paid more times.

The check I'd do before buying either: write down the target, the loss limit and the number of steps, work out D / (T + D) for each step, and multiply. It takes a minute, and it tells you whether the design is easier or only looks it.

[Fairman]

A real edge changes the comparison. For a trader who wins 45% at 1.5R, with no costs, the exact pass rates are 68.5% for design 1 and 75.3% for design 2. With a cost of 0.1R a trade, wins +1.4R and losses minus 1.1R, they come out at 44.4% and 44.3%, practically a tie. So the two designs run close to equal at zero edge and again with a thin edge after costs, and the edge size decides which of them looks easier. I'd rerun the numbers with your own win rate, reward to risk and cost, since a few points in either input can move the result.

[Fairman]

The loss limit in these formulas is measured from the start of each step, and in some designs it's trailing, meaning measured from the highest balance. With a trailing limit the floor rises as you make profits, and the formulas change. For a trader who gets to +6% in design 1 and then pulls back, a 6% trailing limit would stop out at 0% instead of minus 6%. So read the rule carefully for the word trailing, and use the static formula only when the limit is fixed to the starting balance.

[Fairman]

Step two has a smaller target against the same loss limit, so the zero edge pass probability is higher, 66.7% in my numbers. That tells you how much of the total difficulty sits in step one. The expected number of trades also differs: for a zero edge walk it equals target times floor, so 8 x 10 = 80 trades for step one and 5 x 10 = 50 for step two. Together that's about 130 trades of exposure to costs, against 6 x 10 = 60 trades for design 1, which is part of why the two step design gets hit harder when costs are present.

[Fairman]

Fees add a second dimension. Suppose one fee of $299 covers either design, and use the expected cost of a funded account as the fee divided by the pass rate. At zero edge and zero cost: $299 / 0.375 = $797 for design 1 and $299 / 0.370 = $808 for design 2. With a 0.1R cost per trade: $299 / 0.093 = $3,215 against $299 / 0.052 = $5,728. The two step design costs almost twice as much per funded account once costs are there. Real firms price these designs differently, so use their numbers, but the method of fee over pass rate is the same.