Target versus drawdown ratio

Strip an evaluation down to its two numbers, the profit target and the maximum drawdown, and you get a single ratio that tells you most of what you need to know about how hard the challenge is before you have placed a trade. This lesson computes it, shows what it implies for a trader with no edge, and explains why real pass rates are lower than the ratio alone suggests.

The ratio

Target divided by drawdown allowance.

A ratio of 2.0 means you must make twice what you are allowed to lose. A ratio of 0.8 means the reverse, though the forex version usually comes with a 5% daily limit and a second step, which changes the picture.

What a coin-flipper's odds look like

Suppose a trader has no edge at all: every trade is a fair coin flip for plus or minus the same amount, with no costs. Classic gambler's-ruin arithmetic gives the probability of reaching the target before hitting the drawdown as:

P(pass) = drawdown / (target + drawdown) = 1 / (1 + ratio)

Two things stand out.

First, a coin-flipper passes a 1.5-ratio futures evaluation 40% of the time. That sounds high, and it is why firms need the other rules: trailing drawdown, daily limits, consistency and minimum days all push the real number down, and commissions turn the fair coin into a slightly unfair one.

Second, for a zero-edge trader, position size does not change this probability. Bigger bets get there faster (in fewer trades) but with exactly the same 40%. That is a mathematical property of a fair game, and it is the reason people who size up "to get it over with" are not improving their chances. They are only shortening the wait.

For a two-step forex evaluation, multiply the steps: 0.556 x 0.667 = 37% for the coin-flipper, before daily limits and time limits, which cut it further.

Key idea: The target-to-drawdown ratio sets the baseline difficulty. A zero-edge trader passes a 1.5-ratio challenge 40% of the time no matter how they size; everything the firm adds on top is designed to bring that number down, and everything you add on top has to bring it back up.

Why the real pass rate is lower than the ratio implies

The formula assumes the only way to fail is to reach the drawdown line. In a real evaluation, several other exits exist:

• Daily loss limit. A run of losses within a single day fails the account even if total drawdown room remains.
• Trailing drawdown. The line moves up with peak equity, so the effective drawdown is smaller than the allowance for much of the challenge (Module 2, lesson 2).
• Costs. Commissions and spread make the coin slightly worse than fair. On futures, $4 to $5 per round turn against a $100 risk per trade is 4% to 5% of R every trade.
• Time limits and minimum days. A time limit cuts off slow paths that would have passed; minimum days force you to stay exposed.
• Behaviour. The trader who has lost 60% of the allowance does not trade like the trader who just started.

Layer those on and the coin-flipper's 40% becomes something like 10% to 15%, which is roughly the range firms have disclosed. The rules are doing exactly what they are for.

What the ratio means for your edge

If you do have an edge, the ratio tells you how much of it the challenge consumes. A ratio of 2.0 means that, in expectation, you have to generate 2 drawdown-allowances of profit while never once giving back 1 allowance. The next lesson converts that into an expectancy you must have, and a number of trades it will take.

Try it: Compute the ratio for three evaluations you are considering, then the zero-edge pass probability for each. Note which additional rules (daily limit, trailing, consistency, time limit) each one adds. Rank them by how many ways there are to fail, not by fee.

Recap

• Target / drawdown is the baseline difficulty; futures evaluations commonly sit at 1.5 to 2.0, forex steps at 0.5 to 0.8.
• A zero-edge trader passes with probability 1 / (1 + ratio); size does not change it, only how fast it resolves.
• Daily limits, trailing drawdown, costs, time limits and behaviour bring the real pass rate down to roughly 10% to 15%.
• With an edge, the ratio tells you how much profit you must generate per unit of drawdown you can never give back.