Between Profit and Loss in Forex Trading
The variety of money management strategies in the market is actually not quite right. The ideas need to be re-adjusted to fit the forex trading system.
When we trade in the forex market or other markets, we often get a story about various strategies, whether it’s general money management that requires that average profits be more than the average loss of commodities. It is very easy to assume that the general advice is true. However, if we examine deeper into the relationship between profit and loss, it is clear that the ideas may need to be re-adjusted.
Ratio of Profit – Loss
The profit-loss ratio refers to the average profit size when compared to the average size of trade losses we have made. For example, if the expected profit is $ 900 and the expected loss is $ 300 for a given trade, the profit-loss ratio is 3: 1 – $ 900 divided by $ 300. At first, people will agree with this recommendation.After all, should not potential harm be kept as small as possible and every potential profit to be greater? The answer is, not always.
In fact, this common part of this suggestion can be misleading, and can cause threat to your trading account. While other suggestions have a profit ratio of at least 2: 1 or 3: 1 in every open trading positions it is more-simple as it does not take into account the practical realities of the forex market (or any other market), individual trade style and average individual profitability per -trading factor (APPT), also called statistical expectations.
The Importance of Average Profitability per Trade
The average trading profit (APPT) basically refers to the average amount you can expect to win or lose on any trade. Most people just focus on their benefits alone, either balancing the loss ratio or the accuracy level approach to their trades that they do not realize there is a bigger picture is the performance of your trading transaction depending on your APPT. This is a formula to calculate the average profit from each trade that you can make a general rule: Average Per Profitability Trade = (Winning Probability x Average Win) – (Probability Loss x Average Loss).
Let’s explore APPT from the following hypothetical scenario,
Scenario A : Say of the 10 transactions you open, you get a profit on the transaction, while others you lose. Your probability of winning is 30%, or 0.3, while your loss probability is 70%, or 0.7. your average profit trading is around $ 600 and an average loss of $ 300. In this scenario, APPT is: (0.3 x $ 600) – (0.7 x $ 300) = – $ 30 As you can see, APPT is a negative number, which means that for each of your trades you will lose about $ 30. That’s a losing proposition.Despite the 2: 1 profit-loss ratio, this trading approach generates a profit of around 30%, and negates the benefits that should have a 2: 1 profit-loss ratio.
While scenario B : Let’s explore APPT from a trading approach using a 1: 3 profit-loss ratio, but more Profit than loss. Let’s say from 10 transactions, you make a profit on the eight Transactions you make, while the other two you experience loss. Here is the APPT: (0.8 x $ 100) – (0.2 x $ 300) = $ 20 In this case, although this approach has a 1: 3 profit-loss ratio, APPT is positive, which means you can experience profits from time to time.
Many Ways to Make Profit When we are trading on the forex market, there is no one-size-fits-in setup money management or trading approach. Perhaps a traditional suggestion needs to be understood, such as ensuring a greater profit when compared to a loss, does not have much substantial value in the real world of trading unless you have a high probability of realizing a trade that you think will benefit greatly. The important thing is that your APPT appears positive and your overall profit is more than your overall loss.