Between Profit and Loss Forex Trading

When we trade in the forex market or other markets, we often get a story about a variety of strategies, both general money management that requires that the average profit is more than the average loss of trade. It is indeed very easy to assume that the general advice is true. However, if we go back deeper into the relationship between forex trading profits and losses, it is clear that these ideas may need to be adjusted again.

Profit - Loss ratio
The profit-loss ratio refers to the size of the average profit when compared to the size of the average loss of trade that we have done. For example, if the expected profit is $ 900 and the expected loss is $ 300 for a particular trade, the profit-loss ratio is 3: 1 - $ 900 divided by $ 300. At first, people will agree with this recommendation. After all, shouldn't the potential loss be kept as small as possible and every potential profit to be even bigger? The answer is, not always.

In fact, this general part of this suggestion can be misleading, and can cause threats to your trading account. While the other suggestions have a profit-loss ratio of at least 2: 1 or 3: 1 at each open trading position is simpler because it does not consider the practical reality of the forex market (or other markets), individual trading style and profitability per individual average -factor trade (APPT), which is also called statistical hope.

The Importance of Per-Trade Average Profitability
The average trading profit (APPT) basically refers to the average amount you can expect to win or lose on every trade. Most people only focus on their profits, both balancing the loss ratio and the approach to the level of accuracy in their trade that they don't realize there is a bigger picture that the performance of your trading transaction depends on your own APPT. This is a formula for calculating the average profit of each trade that you can make as a general benchmark: Average Per Trade Profitability = (Winning Probability x Winning Average) - (Probability of Loss x Average Loss).

Let's explore the APPT of the following hypothetical scenario,

Scenario A: Let's say that of the 10 transactions that you open, you get a profit on the transaction, while the other you experience a loss. Your probability of winning is 30%, or 0.3, while your probability of loss is 70%, or 0.7. your average trading profit is around $ 600 and your average loss is $ 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, which means that for each trade you will lose around $ 30. That's a losing proposition. Even though the profit-loss ratio is 2: 1, this trading approach takes profit around 30%, and eliminates the benefits that should have a profit of 2: 1 profit-loss ratio.

While scenario B: Let's explore the APPT of the trading approach by using a 1: 3 profit-loss ratio, but more profit than loss. Say from 10 transactions, you make a profit on the eight Transactions that you make, while the other two you experience loss. Here is this APPT: (0.8 x $ 100) - (0.2 x $ 300) = $ 20 In this case, even though this approach has a 1: 3 profit-loss ratio, the APPT is positive, which means you can experience profits from time to time.

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Many ways to get profit When we trade on the forex market, there is no one size that fits in any money management or trading approach. Maybe a traditional suggestion needs to be understood by you, such as ensuring a greater profit compared to a loss, does not have much substantial value in the real trading world 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.