When we’re trading in forex market or any
other market, we often get a story about various strategies, both general money
management requires that the average gain over the average loss per trade. It
is very easy to assume that the general counsel is correct. However, if we examine about it back more deeper into the
relationship between profit and loss, it is clear that these ideas may need to
be readjusted.
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| Profit and Loss in Forex Trading |
Ratio
of Profit and Loss
Ratio profit and loss refers to the size of
the average when compared with the average size of trading losses which we have
done. For example, if the expected profit is $ 900 and the expected loss is $
300 for a particular trade, the ratio of profit - loss is 3: 1 - $ 900 divided
by $ 300. In the beginning, people would agree with this recommendation. After
all, Shouldn’t the potential loss to be kept as small as possible and any
potential profit to be bigger? The answer is, not always.
In fact, this common piece of advice can be
misleading, and could cause a threat to your trading account. While the
suggestion, that the other has a ratio of income - a loss of at least 2: 1 or
3: 1 on every open position trading is over-simple because it does not consider
the practical realities of the forex market (or other markets), individual
trading style and average profitability of individual per Factors trade (APPT),
which is also called statistical expectations.
Importance
of Average Profitability per Trade
Average Profit Per Trade (APPT) basically
refers to the average amount that you can expect to win or lose on each trade.
Most people are only focused on their profit alone, either balance the loss
ratio and the top levels of accuracy in trading approach that they do not
realize there is a bigger picture is that the performance of a trading transaction
you depends on your own APPT. This is a formula to calculate the average profit
from each trade that you can make a general rule: Average Profitability Per
Trade = (Probability of Win x Average Win) - (Probability of Loss x Average
Loss).
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| Profit and Loss in Forex Trading |
Let's explore the APPT of the following
hypothetical scenario,
Scenario A:
Let's say out of 10 trades that you open, you
get a profit on the transaction, while others you will lose. Your probability
of winning is 30%, or 0.3, while your probability of loss is 70%, or 0.7.
Average trading your profit of about $ 600 and an average loss of $ 300. In
this scenario, the APPT is: (0.3 x $ 600) - (0.7 x $ 300) = - $ 30 As you can
see, the APPT is a negative number, meaning that for every trade you, where you
will lose about $ 30. It's a losing proposition. Although the ratio of profit -
loss of 2: 1, this trading approach to generate a profit of about 30%, and
negates the benefits that should have an advantage profit ratio - loss of 2: 1.
While the scenario B:
Let's explore the APPT of a trading approach
by using the ratio of profit - loss 1: 3, but more profit than loss. Say of 10
transactions, you make profit on eight transactions you do, while for the other
two, you experienced loss. Here are the APPT is: (0.8 x $ 100) - (0.2 x $ 300)
= $ 20 In this case, although this approach has a ratio of profit - loss 1: 3,
APPT is positive, which means that you can experience the benefits from time to
time.
Many ways to get profit when we are trading in
the forex market, there is no one size that fits in each money management or
trading approach. Perhaps a traditional advice necessary for you to understand,
such as ensuring a bigger profit compared with a loss, does not have much
substantial value in the real trading world unless you have a high probability
trade in realizing that you think will benefit greatly. What matters is that
your APPT appeared positive and your overall profit is more than your overall
losses.
