How execution costs change trading expectancy and position risk
Two reproducible scenario analyses show how a small cost can consume a modelled trading edge and how lot rounding keeps a planned loss inside its budget.
1. Cost in R and net expectancy
Assumptions: win rate 45%; average gross winner 1.8R; average gross loser 1R. R is the initial planned risk of one trade. Gross expectancy = 0.45 × 1.8 − 0.55 × 1 = 0.26R per trade. A constant additional cost is charged on both winners and losers.
Finding within this model: a cost of 0.30R changes +0.26R gross expectancy into −0.04R net expectancy. At 0.26R, the model breaks even. These are arithmetic conditional results; they do not establish that any actual strategy has a stable edge.
| Cost per trade (R) | Gross expectancy (R) | Net expectancy (R) | Break-even win rate | Reproduce |
|---|---|---|---|---|
| 0.00 | 0.2600 | 0.2600 | 35.7143% | Open scenario |
| 0.05 | 0.2600 | 0.2100 | 37.5000% | Open scenario |
| 0.10 | 0.2600 | 0.1600 | 39.2857% | Open scenario |
| 0.20 | 0.2600 | 0.0600 | 42.8571% | Open scenario |
| 0.26 | 0.2600 | 0.0000 | 45.0000% | Open scenario |
| 0.30 | 0.2600 | -0.0400 | 46.4286% | Open scenario |
| 0.40 | 0.2600 | -0.1400 | 50.0000% | Open scenario |
| 0.50 | 0.2600 | -0.2400 | 53.5714% | Open scenario |
Formula: net expectancy = p × average win − (1 − p) × average loss − cost. Break-even win rate = (average loss + cost) / (average win + average loss). A measured net winner or loser already includes some execution costs: deduct only additional costs that have not been included.
2. Spread cost, lot rounding and risk budget
Assumptions: account 10,000 USD; risk budget 1% = 100 USD; technical stop distance 20 pips; pip value 10 USD per lot; round-trip commission 7 USD per lot; additional slippage zero; volume step and minimum lot 0.01. The spread is additional and has not already been included in the stop distance.
| Additional spread (pips) | Risk per lot (USD) | Theoretical lots | Rounded lots | Planned total loss (USD) |
|---|---|---|---|---|
| 0.0 | 207.0000 | 0.48309179 | 0.48 | 99.3600 |
| 0.5 | 212.0000 | 0.47169811 | 0.47 | 99.6400 |
| 1.0 | 217.0000 | 0.46082949 | 0.46 | 99.8200 |
| 2.0 | 227.0000 | 0.44052863 | 0.44 | 99.8800 |
| 3.0 | 237.0000 | 0.42194093 | 0.42 | 99.5400 |
| 5.0 | 257.0000 | 0.38910506 | 0.38 | 97.6600 |
Risk per lot = (stop + additional spread + additional slippage) × pip value + round-trip commission. Lots are rounded down to the broker step; if they fall below the minimum lot, executable volume is zero. With a 1-pip additional spread, the result is 0.46 lots and a modelled loss of 99.82 USD. A gap or adverse execution can exceed the planned loss.
Methodology and limitations
- The tables are deterministic calculations. They do not use a sample of real trades and contain no empirical success probabilities.
- Fixed inputs isolate one relationship. Real spreads, slippage, win rates, payoff distributions and market regimes vary.
- The expectancy model has two outcome averages; it does not describe tail risk, trade dependence or the path of capital.
- Risk budgets and stop losses are planning constraints; execution is not guaranteed.
Suggested citation: ForexMechanics, “How execution costs change trading expectancy and position risk”, scenario analysis v1.0, 26 October 2026, engine 3.1.0. Cite the relevant table and its assumptions. You may reuse exported tables with attribution and a link to this methodology.
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