Understanding Your Handicap

Here is how to calculate your trading handicap. There are three different factors that create a handicap in trading.

1. Drawdown percentage
2. Spread
3. Commissions

Drawdown handicap percentage is only around 51-53% as long as you only risk 1-5% per trade. 2% risked per trade is a approx 1% handicap.

So, your initial handicap is drawdown... 1%.

Your second handicap is spread. In the EUR/USD if your getting a 1 pip spread that means two pips round trip. If your capturing 10 pips that is a 20% handicap. If your capturing 20 pips that handicap is reduced to 10%.

A lot of newbies are scared and doing small trades for small amounts... The irony about this is that this is lowering their odds of winning by a very LARGE amount. I only trade when I think I have a shot at more than 20 pips on the trade. Never trade during off hours chop.

Commissions handicap is more for stocks trades... But some FX brokers have commissions. It's calculated the same way...

Percentage of trade.
If your trying to capture $100 in the /ES at a time with one lot and risking $100... If your comms are $4 that is a 4% handicap. The spread handicap on that trade is $12.5 or 12.5% handicap.

So scalping $100 off the es at a time has a total handicap of 16.5%.

If your going for $250 a pop with one contract your handicap is 6.6%. Handicap is costs divided into trade target/risk amount. If they are both equal it's easy to calculate.


So, want to bring your handicap down to the level of the /ES futures in Forex? 30 pips is the magic number with a 1 pip spread... Equivalent to trying to capture $250 at a time with one emini.


Once you understand your handicap then you realize what win rate you need to achieve to make positive gains. I have another thread that explores drawdown handicap.

My threads involving statistics and math scare everyone away? LoL...

Anyway... Here is a more complex scenario...
What is the odds handicap of a trade with a 20 pip target and 10 pip stop?

Lets just solve each part of this problem separately and break it down...

Assume 2 pip spread/commissions round trip. Works out to a 10% handicap for the target, and a 20% handicap for the stop.

Now... To solve the problem we also need to know the win rate of the trading system. We need to know the odds of either side being hit!

Lets say a 40% win rate for example... The odds of the target being hit are 40%, and the stop being hit are 60%. To solve the actual commissions handicap lets take 10% x .4 and 20% x .6. Add both together... 4%+12% = 16% handicap.

So, for a trading system that averages 40% win rate with a 20 pip target and 10 pip stop you have a commissions handicap of 16%.


Now I am not exactly sure how to calculate the commissions handicap into the win rate... I think it's a direct negative. So essentially it brings the win rate odds down by 16%... Essentially causing a 40% win rate to act like a 33.6% win rate when the trading system is actually deployed in the real world.


Anyway... Would appreciate it if some people joined in on my little math party. Only reason I am doing this in public is because I am not 100% sure about my numbers. If you see any errors correct them please!


If you go through the math you eventually come to the conclusion that pure technical odds systems need to be traded on a very long timeframe and with very large targets/stops in order to reduce the statistical odds handicaps... However, in the real world... A experienced trader using an solid system in addition to monitoring news and using common sense can be so effective he/she can be profitable with 30-40% handicap... Some humans are just that good at knowing what other humans are thinking just like in poker.

Your calculation of the spread handicap is flawed. If the spread is 1 pip your handicap is 1 pip not 2 (or 10% on a 10 pips trade).
Spread is the cost of "instantly" buy and selling an amount of a currency. If you are quoted 1.2500 - 1.2501 you can "instantly" buy and sell the same amount losing 1 pip.
You can also think in this way: on 1.2500 - 1.2501 the "real" market price is 1.25005, so if you are buying at 1,2501 you're paying 0.5 pip. Suppose that when you return to your market maker he is quoting you 1,2520 - 1,2522 (2 pips spread), you can suppose that the "real" market price is 1.2521, so selling at 1.2520 you are "paying" 1 pip. Round turn you have payed 1.5 pips. With your calculation would be 3 pips and that's not correct.

LoL... That is hilarious... I always thought I was paying 1-1.2 pips both for selling and buying... Never actually payed close attention.

So 1-1.2 pips is the round trip at Oanda? I primarily trade the /ES so I thought the spread worked the same way in Forex as futures.

Been having a frigging annoying night... Keep buying bottoms and no buyers come in... So, I buy some dips after a volume spike expecting some big buyers to come in after the A-B-C move... Just lazily drifts up... Cut positions at the daily half pivot... I buy the next dip at good prices... Drifts up and then starts forming a lower high... #**# cut positions just before the drop... Another vol spike... I buy in within a couple pips of perfect prices... And again... Hardly any buyers coming in on the reversal... Cut positions.

Argh... Well... The T/R ratio (Trending/Ranging) ratio is headed over 25... Ugh... Downtrend velocity of 3-6 pips per 50 minutes can only be countered if the range stays high enough... Should have been trading the pound tonight! It's patterns were much better. Made some $$ but wasn't worth the hassle... Now this market is trending... Should have been applying my trending strategy...

For some reason I thought the price strength on the 120m-240m would hold the euro together for a bit longer... Might have been some news that kick started that pre-market slide... All that work to position perfectly and no solid buying surge ever happened out of the dips...