Your real risk on a 3-pip stop is not 3 pips

[Amanhasnoname]

Blunt version: on tight stops the spread is a big piece of the risk, and most sizing formulas pretend it is not there.

Say EURUSD, 0.8 pip spread, stop 3 pips from the chart price at entry. A long fills at the ask, but the stop is triggered by the bid. If the stop is measured from the chart (bid) price, the real loss when it triggers is 3 plus 0.8, so 3.8 pips. Spread alone is 21 percent of that. If the stop is measured from the fill price instead, the chart only needs to move 2.2 pips to trigger it, and spread is 27 percent of the 3 pips.

Add commission equal to 0.6 pip round turn and costs are 1.4 pips against a 3-pip stop, about 47 percent of the nominal risk.

This matters for sizing. Size 1 percent risk off a 3-pip assumption, take a 3.8-pip loss, and the real loss is 1.27 percent of the account. Do that for a bad run of ten trades and the drawdown is noticeably deeper than the plan said.

Decide which definition of stop distance the sizing uses, and include spread and commission in it.

How do you define stop distance when sizing, from chart price or from the fill including costs, and did switching change your numbers much?